Covered Call
Holding shares while selling a call against those shares, receiving premium in exchange for accepting an obligation to sell at the strike.
What is a Covered Call?
Holding shares while selling a call against those shares, receiving premium in exchange for accepting an obligation to sell at the strike.
Construction
Own the contract-equivalent number of shares and sell one call. The share position covers the delivery obligation.
When it may be studied
To study premium collection when willing to cap upside and potentially sell shares at the strike.
Expiration profile
Maximum risk: Substantial stock downside minus premium received
Maximum reward: Limited to call strike appreciation plus premium
Break-even: Stock cost basis minus call premium, simplified
Worked example
Own 100 shares at $50 and sell a 55 call for $2. Simplified break-even becomes $48. Upside above $55 is generally surrendered if assigned.
Key risks and limitations
The call premium provides only limited downside cushioning. The stock can fall substantially, and early assignment can occur, especially around dividends.
Entry and exit checklist
- Confirm contract multiplier, expiration, exercise style, settlement, and liquidity.
- Calculate the maximum loss under the intended structure.
- Review earnings, dividends, corporate actions, and other event risks.
- Define an exit, adjustment, or expiration plan before entry.
- Understand what happens if one leg is assigned or exercised early.