Essentials · strategy explainer
All figures are a worked example with a made-up stock. They show how the strategy behaves, not what to expect in real trading.
Covered call
Own the shares and sell a call against them. The premium is yours to keep; in return you give up the gains above the strike. Most traders sell a call above the stock price; selling one at or below it brings in more premium and a bigger cushion, in exchange for less upside and a likelier assignment.
The trade
- ACME at $100
- Bought 100 shares, sold the $105 call for $2.16 a share ($216.00 a contract)
- 45 days to expiry
- Implied volatility 28%
- Premium received: $216.00 per contract ($2.16 a share)
- Net cost, the shares less the premium: $9,784.00 per contract ($97.84 a share)
- Max profit: $716.00
- Max loss: $9,784.00 if ACME went to zero
- Breakeven: $97.84
The setup
- The position
- Long 100 shares, short one call, most often above the stock price.
- When traders use it
- To earn income on shares already owned, accepting a cap on the upside.
- The risk
- The shares carry nearly all the downside: the premium lowers your breakeven to $97.84 in this example, and below it the position loses almost as much as the stock does.
Profit and loss per contract
Its Greeks
At the start in this example: 45 days to expiry, ACME at $100, implied volatility 28%.
Deltapositive
0.654 a share (65.4 per contract)
Helps when the stock rises toward the strike: the shares gain more than the call.
Hurts when the stock falls: the shares lose and the call offsets little of it.
Gammanegative
−0.0375 a share (−3.75 per contract)
Helps when the stock sits still, so delta stays where it is.
Hurts on a big move either way: a rally runs into the cap, a drop leaves the shares almost unhedged.
Thetapositive
$0.0438 a share a day ($4.38 per contract)
Helps each day the stock stays below the strike: time eats the call you sold.
Hurts little on its own: the decay is small next to what the shares can lose.
Veganegative
−$0.1295 a share a volatility point (−$12.95 per contract)
Helps when implied volatility falls, which cheapens the call you are short.
Hurts when implied volatility rises, which lifts the call against you.
Choosing the strike
The same 100 shares and the same 45-day expiry at 28% implied volatility in this example, with the call sold at three strikes.
| Out of the money$105 | At the money$100 | In the money$95 | |
|---|---|---|---|
| Premium | $216.00$2.16 | $416.00$4.16 | $715.00$7.15 |
| Of which time value | $216.00$2.16 | $416.00$4.16 | $215.00$2.15 |
| Breakeven | $97.84 | $95.84 | $92.85 |
| Max profit | $716.00$7.16 | $416.00$4.16 | $215.00$2.15 |
| Fall before a loss | $2.162% | $4.164% | $7.157% |
| Position delta | 0.65465.4 | 0.46046.0 | 0.26726.7 |
Money per contract, a share below it. A move in the stock is a share, with its share of the price below. Delta a share, per contract below.
Out of the money, at $105 in this example, the call brings in the least, $216.00, but leaves the shares room to rise to the strike, so the most the trade can make is the largest: $716.00.
At the money, at $100 in this example, the premium is larger, $416.00, all of it time value: the cushion grows to $4.16 a share, and the shares have no room left to gain.
In the money, at $95 in this example, the premium is the largest, $715.00, and so is the cushion, $7.15 a share; but most of that premium is the call's intrinsic value, which you give back when the shares are called away, so the return comes from the time value alone, $215.00, and assignment is likelier.
Two ways one trade can go
A hypothetical scenario to show how the Greeks behave; not a prediction or a recommendation.
When it goes your way
A strong quarter, ACME jumps
When it goes against you
A downgrade, ACME slides
Each story follows the trade through one move: what happened, the profit and loss chart, the story's Greek across prices, the Greeks before and after and the lesson. Stories are part of Pro.
Common mistakes
The mistakes traders make most with this strategy, with the figures that show why. Part of Pro.
Test yourself
Questions on the covered call, with the full explanation after each answer.
All figures come from the pricing engine for this made-up scenario: the rate is 4% in this example unless a story changes it, no dividend, one implied volatility for every leg. The stories round money to whole dollars; their tables show cents.