What is a Covered Call?

A covered call is an options strategy with two parts: you own 100 shares of a stock, and you sell one call option on those same shares. The buyer of the call pays you a premium up front. In return, you agree to sell your shares at the strike price if the buyer exercises the option.

It is called covered because the shares you already own cover your promise to deliver them.

Your profit per share at expiration is:

\(\Pi = (S_T - S_0) + c - \max(S_T - K,\ 0)\)

Where:
\(S_0\) is the price you paid for the shares, and \(S_T\) is the share price at expiration.
\(K\) is the strike price of the call you sold.
\(c\) is the premium you received, per share.

Three numbers follow from it:
Maximum profit: \((K - S_0) + c\), reached when the stock ends at or above the strike.
Breakeven: \(S_0 - c\)
Maximum loss: \(S_0 - c\), if the stock falls to zero.
Payoff diagram of a covered call: profit rises with the share price until the $55 strike, then flattens at $6.50 per share; breakeven is $48.50

Remember

Four things to keep in mind about a covered call.

  • Your upside is capped: above the strike price, any further gain in the stock goes to the buyer of the call.

  • Your downside stays: the premium cushions a fall by its own size and no more, so a large drop costs you nearly as much as owning the shares alone.

  • Time works for you: as the seller of the call, you gain as the option's time value decays toward expiration.

  • Quiet markets pay best: the ideal ending is a stock at or just below the strike, so you keep both the premium and your shares.

Why Write a Covered Call?

A covered call turns a market view into income. If you own shares and expect the price to drift sideways or rise only a little, the call premium pays you for that outlook. What you give up is the large upside you did not expect anyway.

It also shows a deep idea in options: payoffs are built from parts. A covered call (long stock plus a short call) has the same payoff shape as a cash-secured put at the same strike and expiration, a consequence of put-call parity. Our Stock Options course builds every strategy from a handful of these building blocks.
A garden gate at dusk, golden light inside and a low iron fence above the plants

A Worked Example: Buy 100 Shares at $50, Sell One 30-Day $55 Call for $1.50

  • The Stock Falls to $45

    The call expires worthless. Your shares lose $500, the premium brings in $150, and you end down $350, against $500 for the shares alone. Your breakeven was $48.50.

  • The Stock Stays at $50

    The call expires worthless. You keep the $150 premium, a 3% return on your shares in one month, and you still own them.

  • The Stock Rises to $60

    The call is exercised and you sell at $55. The $500 gain on the shares plus the $150 premium makes $650, the most this trade can earn. Holding the shares alone would have made $1,000.

FAQ

  • What happens if my shares are called away?

    You sell your 100 shares at the strike price and keep the premium. That is the trade's maximum profit; what you give up is any gain above the strike.

  • Can you lose money on a covered call?

    Yes. If the stock falls by more than the premium you received, the position loses money. The premium lowers your breakeven; it does not protect you from a large drop.

  • Can the call be exercised before expiration?

    With an American-style option, yes. Early exercise is most likely when the call is deep in the money, and just before the stock pays a dividend, since exercising lets the buyer collect it. American vs. European options explains the difference.

  • How do I choose the strike price?

    It is a trade-off. A strike close to today's price pays a larger premium but caps your gains sooner and makes assignment more likely. A higher strike pays less but leaves more room for the stock to rise. Expiration works the same way: a longer-dated call pays more, for a longer commitment.

  • How is a covered call related to a cash-secured put?

    At the same strike and expiration, the two have the same payoff shape: limited gain, with most of the downside of owning the stock. This follows from put-call parity. You hold shares in one case and cash in the other.

Learn Covered Calls, and Every Strategy Built Like Them

Our Stock Options course covers covered calls, protective puts, cash-secured puts, spreads, straddles and strangles, the Greeks, and volatility, in video lessons with quizzes.