basicLow RiskNeutral / Mildly Bullish

Covered Call

Own 100 shares and sell a call against them to collect premium income — capping your upside.

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What is a Covered Call?

A covered call involves owning 100 shares of a stock and selling one call option against that position. The call buyer pays you a premium, which you collect immediately and keep regardless of what happens next. If the stock stays below the strike price at expiration, the call expires worthless, you keep the premium, and you still own your shares — free to sell another call next month. If the stock rises above the strike price, your shares get "called away" at that price (you are obligated to sell them at the strike), but you still keep the premium collected. The covered call is one of the most widely used options strategies because it generates consistent income from an existing stock position, effectively lowering your cost basis over time. The tradeoff is that you cap your upside — if the stock surges far above the strike, you miss out on those gains beyond the call strike.

When to use it

Covered calls work best when you are neutral-to-mildly bullish on a stock you already own and are comfortable selling it at the strike price. They are ideal in flat or slowly rising markets where the stock is unlikely to make a large move. If you are very bullish and expect a sharp rally, the covered call will cap your gains — in that scenario, you're better off just holding the shares. The strategy also shines when implied volatility is elevated because you collect more premium for the same strike. Avoid selling calls on stocks you do not want to part with — there is always a chance of assignment. The covered call is most effective as a systematic income strategy applied repeatedly over time, gradually reducing your effective cost basis in the stock.

Structure

Own 100 shares of the underlying stock, then sell 1 call option at a strike above the current stock price and with your target expiration. Most traders sell calls 30–45 days to expiration at a strike 5–10% above the current price. This combination creates a position where the shares provide the collateral for the short call, eliminating any margin requirement.

Key Metrics

Max Profit
Capped at (strike price − original stock purchase price + premium received) × 100. If the stock rises above the strike, your shares are called away at the strike and you keep the premium, but you cannot profit from any rally beyond the call strike. For example, owning stock at $45, selling a $50 call for $1.50, your maximum profit is $6.50 per share or $650 per contract.
Max Loss
Equivalent to owning the stock — if the stock falls to zero, you lose the stock value minus the premium received. The call premium provides a small cushion (it lowers your breakeven by the amount of premium collected) but does not protect against a large stock decline. The covered call is not a hedging strategy — it is an income strategy on a stock you intend to hold.
Breakeven
Original stock purchase price minus the premium received per share. The premium lowers your effective cost basis. For example, if you bought stock at $45 and sold a call for $1.50, your breakeven is now $43.50. If the stock falls to $43.50 at expiration, the total P&L (stock loss + call premium) is zero.
Greeks Profile
Net delta is lower than owning the stock outright — the sold call has negative delta that partially offsets your long stock delta. You remain bullish but less sensitive to small price moves. Theta is positive — you are the option seller, so time decay benefits you. Every day that passes without the stock reaching the strike adds to your effective profit. Vega is negative — a drop in implied volatility (after an event resolves) benefits the short call, as you can close it for less than you collected.

Tips & Best Practices

  • 1Sell calls at strikes you would genuinely be happy selling your shares at — do not pick a strike so close it caps a rally you actually want.
  • 230–45 DTE is the optimal window for premium decay — theta decay accelerates most in the final 30 days.
  • 3When the sold call approaches expiration worthless, buy it back for a few cents and sell the next month's call to roll the income forward.
  • 4If the stock rallies toward the strike, you can roll the call up and out (buy to close, sell a higher strike in a later expiration) to avoid assignment while collecting additional credit.
  • 5Covered calls work best on lower-volatility, dividend-paying stocks you intend to hold — not on high-momentum growth names that can gap sharply.
  • 6Track your total premium collected over time — this is your cumulative income that directly reduces your cost basis in the position.
  • 7Avoid selling calls with very tight strikes during earnings — the stock can gap through the strike and you miss a large move.
  • 8If you get assigned (shares called away), the covered call still worked as intended — you sold at your target price and collected income.

See it in action

Model a Covered Call with a real ticker. See the P&L chart, heatmap, and exact breakevens.

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