What Is a Covered Call?
A covered call means owning 100 shares and selling a call option on them, collecting the premium in exchange for giving up gains above the strike. How it works, what you give up, and the risk that remains.
In one sentence
Covered call. Selling a call option on shares you own. You collect the premium and give up any rise above the strike price.
How it works
You own 100 shares and sell one call option against them. The premium is yours to keep. In exchange, if the share price ends above the strike, you must sell your shares at the strike price. The call is "covered" because you already own the shares you might have to deliver.
| Share price at expiration | Shares alone | With the covered call |
|---|---|---|
| $40 | −$1,000 | −$800 |
| $50 | $0 | +$200 |
| $55 | +$500 | +$700 |
| $70 | +$2,000 | +$700 |
The premium helps when the shares are flat or fall a little, and the gain is capped at $700 however high the shares go.
What you give up
A covered call trades the best outcomes for a small, steady payment. You keep almost all the downside of owning the shares, softened only by the premium, and you give up the big gains. Over a long period, the cases where the shares jump past the strike are the ones that cost the most.
Learn it properly
- Covered Calls and Protective PutsDerivatives (depth track) · Free