Covered Call: How It Works, With Example
A covered call means selling a call option against 100 shares you already own. You collect the premium immediately. If the stock stays below the strike, the call expires worthless and you keep both the shares and the premium. If it rises above the strike, your shares are sold at the strike price - you still profit, but you give up any gain beyond it.
How it works
- Own (or buy) 100 shares of the stock for each contract you plan to sell.
- Sell one call at a strike you would be happy to sell the shares at, about 30 to 45 days out.
- Collect the premium right away - it is yours whatever happens next.
- At expiration, keep the shares if the stock is below the strike, or let them be called away at the strike.
When to use it
Use it when you own a stock you expect to trade sideways or rise slowly, and you want extra income from it. It also fits after a strong run, when you would be comfortable taking profits at a higher price.
Profit, loss and breakeven
Max profit
Strike minus your share cost, plus the premium, times 100.
Max loss
Your share cost minus the premium, times 100, if the stock goes to zero. The premium only cushions the drop.
Breakeven at expiration
Your share cost minus the premium received.
Example trade
You own 100 shares of XYZ at $100 and sell the $105 call for $2.00 ($200). If XYZ ends below $105, you keep the shares and the $200. If it ends above $105, your shares are sold for a total profit of $700 ($5 stock gain plus $2 premium, times 100). Breakeven is $98.
Covered Call on the Strategy Price Timeline
Example on a $100 stock with 35 days to expiration. The shaded bands show where the stock needs to be at expiration for the trade to profit, partially lose or reach the max loss - the same chart every EasyTrade signal shows.
Swipe to see full chart →Profit zone
Loss zone
Risks to know
- You keep the full downside of owning the stock, reduced only by the premium.
- If the stock rallies far above the strike, you miss the gains beyond it.
- The call can be exercised early, especially before an ex-dividend date, so your shares may be sold sooner than planned.
How EasyTrade manages it
EasyTrade closes covered call signals once 90% of the premium is captured, or lets the call expire. If the call finishes in the money, the shares are sold at the strike and the result includes both the stock gain and the premium.
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