Covered Call Strategy

How CC works

The premium reduces your cost basis and adds income, but it caps the upside you already own. The trade makes sense when you are happy to sell the shares at the strike.

Exact option legs

Long 100 shares + sell 1 call

• SELL 1 × $105.00 call expiring 2026-01-16 at $2.20

Payoff, breakeven and risk

At expiration the position is worth the intrinsic value of each leg. The maximum profit is $1,520.00, the maximum loss is -$8,980.00, and the position breaks even at $89.80.

Worked example

With the underlying at $103.00:

• Selling the 105 call for 2.20 collects $220 against 100 shares.
• The effective sale price becomes $107.20 if the stock is called away.
• Breakeven on the position drops from the $92 cost basis to $89.80.

Strike selection

Sell the strike you would accept for the shares. Further out-of-the-money strikes collect less premium but keep more upside; near strikes collect more and are more likely to be called away.

Expiration selection

Short expirations let you recycle premium but cap gains over a short window; longer expirations collect more but lock the shares to the strike for longer.

Common mistakes

• Selling calls against shares you are not willing to sell, then buying them back at a loss.
• Chasing the highest premium with a strike far below your cost basis.
• Forgetting that dividends and early assignment can change the outcome.

FAQ

What is the maximum profit on a covered call?

Strike minus cost basis plus premium received, per 100 shares.

Can a covered call lose money?

Yes. If the stock falls more than the premium collected, the position loses money despite the income.

Does a covered call cap my upside?

Yes. Above the strike, gains belong to the call buyer.

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