The covered call, explained
You own a hundred shares. You sell one call against them. The buyer pays you now for the right to take those shares at a fixed price later — and if they do, you have sold at a price you chose when you opened the position.
- Construction
- Long 100 shares + short 1 call
- Outlook
- Neutral to mildly rising
- Premium
- Collected at entry
- Complexity
- 1 of 3
What it is
A covered call is two positions held at once: shares you own outright, and one call option sold against them. The call is covered because if the buyer exercises, you already hold the shares to deliver — you are not scrambling to buy them at whatever the market asks.
The premium is yours the moment the position opens and stays yours in every outcome. What you give away is the upside above the strike: past that price the shares are called away and you do not participate in the rest of the move. That is the whole trade — a known payment now, against an unknown amount of upside later.
The position does not protect you on the way down. If the shares fall, you own falling shares; the premium softens the first part of the decline and nothing more. A covered call is an adjustment to a long stock position, not a hedge for one — and confusing those two is the most expensive misunderstanding in this guide.
How it works
Hold the shares
One hundred shares per contract, since a standard equity option controls exactly that many. Fewer than a hundred and the call is not covered; a broker will either refuse the order or treat it as a naked short call, which is a different position with a different worst case.
Choose a strike above the current price
The strike is the price at which you are agreeing to sell. Closer to the current price pays more premium and gives away more of the upside; further away pays less and keeps more room. There is no correct answer here, only a trade you are making knowingly.
Choose an expiry
Nearer expiries pay less per contract but come round more often; longer expiries pay more up front and commit the shares for longer. Time value decays faster in the final weeks, which is the mechanical reason shorter-dated premium is sold more often than longer-dated.
Sell the call and collect
The premium settles into the account immediately. From that moment the obligation exists: if the option is exercised, the shares go at the strike regardless of where the price has travelled.
Let it expire, or close it early
If the price sits below the strike at expiry the call expires worthless, the shares stay, and the position can be repeated. If it sits above, the shares are called away. Either leg can also be bought back before expiry, at whatever it is then worth.
The payoff
- Max profit
- $750
- Max loss
- −$9,750
- Break-even
- $97.50
Worked example
XYZ is a placeholder, not a real security. Every guide in this section uses it at $100 so the structures can be compared directly.
XYZ trades at $100 and you own 100 shares. You sell one call at the $105 strike, thirty days out, and collect $2.50 per share — $250 for the contract.
If XYZ finishes below $105, the call expires worthless. You keep the $250 and the shares. Your position is a hundred shares of XYZ plus $250 you did not have before.
If XYZ finishes above $105, the shares are called away at $105. You made $5 per share on the stock plus the $2.50 premium — $750 in total — and that figure does not change whether XYZ finished at $106 or $160.
Break-even is $97.50: the $100 you paid, less the $2.50 collected. Below that the position is losing money, exactly as the share position alone would be, offset by the premium.
Both sides of it
What it gives you
- The premium is collected up front and is kept in every outcome
- It lowers the effective cost basis of shares already held
- The worst case is the same shares you already owned, minus nothing
- The obligation is fully covered, so no additional margin is tied up
What it costs you
- Upside above the strike is given away entirely
- It provides only token protection against a fall — you still own the shares
- Being assigned may realise a taxable gain in a year you did not choose
- The shares are committed for the life of the option, so they cannot be freely sold
What assignment does
Assignment means the shares leave at the strike. It can happen before expiry — American-style equity options can be exercised at any time — and is most likely just before an ex-dividend date when the dividend exceeds the call's remaining time value. If you would be unhappy selling at the strike, the position was the wrong size or the wrong strike; the option holder decides, not you.
Frequently asked questions
- What happens to a covered call if the stock crashes?
- You keep the premium and you still own shares that have fallen. The call expires worthless, which is the good half; the bad half is that the premium collected is usually small relative to a large decline, so it offsets only the first part of it. A covered call reduces the cost basis slightly. It does not put a floor under the position — that is what a protective put or a collar does.
- Can I lose money on a covered call?
- Yes, on the share leg. The structure's loss is the loss on a hundred shares from where you bought them, reduced by the premium collected. If the shares went to zero you would lose the full position value less that premium. The call leg itself cannot lose you money beyond capping the upside, because it is covered.
- What strike should I sell?
- That depends on what you are willing to sell the shares for, which is a question about your own holding rather than about the option. The mechanical trade-off is fixed and visible in any option chain: strikes nearer the current price pay more and cap sooner, strikes further away pay less and cap later. This page cannot tell you which side of that trade-off to be on.
- What happens if the call is assigned early?
- The shares are sold at the strike and the position closes, possibly weeks before you expected. You keep the premium. The common trigger is a dividend: a holder who wants the dividend will exercise the day before the ex-date if the dividend is worth more than the option's remaining time value. Nothing about this is a failure — it is the obligation you were paid for.
- Is a covered call the same as a cash-secured put?
- Their payoff diagrams have the same shape, which surprises most people the first time they overlay them. A covered call at a given strike and a cash-secured put at the same strike and expiry carry near-identical risk and reward. The practical differences are what you hold while waiting — shares or cash — how dividends fall, and the tax treatment.
Related guides
These guides explain how each structure is built and how it behaves. Nothing here is a suggestion to buy or sell anything, no security is named, no figure is quoted from any market, and no structure is presented as better than another — which one suits a situation is not a question this page can answer.
⚠ Important disclaimer
These calculators are provided strictly for educational and informational purposes. They perform arithmetic on figures you enter. Nothing on these pages is financial, investment, trading, legal or tax advice, nor a recommendation to buy, sell or hold any security, derivative, commodity or cryptocurrency.
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