A covered call holds the deliverable shares and sells a call against them. It exchanges some upside for premium while retaining substantial stock downside.
Identify exactly what is covered
This series uses a standard US physically settled American-style equity call with a 100-share contract multiplier. A long 100-share position and one short call on the same underlying cover that one delivery obligation. Contract specifications matter: adjusted deliverables, index options, other markets and cash settlement can be different.
The example is not a recommendation or a statement that your broker permits the strategy. Check account approval, the exact deliverable and the current options disclosure before trading. Owning cash or an unrelated ETF is not the same as holding the shares required by this covered-call example.
Background source: FINRA: option contracts, rights and obligations
Separate the stock purchase from the option premium
Assume 100 shares bought at USD50 cost USD5,000. Sell one call with strike 55 for a premium quoted as USD2 per share, receiving USD200 before costs. Net opening cash outlay is USD4,800 if the stock is bought at the same time. If the shares were already held, selling the call brings in cash but does not erase their economic exposure.
Our examples exclude commissions, exchange charges, tax, dividends, interest and FX. The USD2 is a hypothetical execution price, not an available quote. The option seller has an obligation that can still have a market value after the premium is received; cash received and profit are different quantities.
Calculate the combined position at expiry
For this hold-to-expiry case, total P&L is 100 × [min(expiry stock price,55) −50 +2]. Below 55 the stock keeps its market exposure; above 55 the written call offsets further stock gains. The maximum profit is(55 −50 +2) ×100 =USD700. Breakeven is 50 −2 =USD48, before costs.
At expiry stock 40, the combined loss is USD800 despite receiving premium. At 50, the gain is USD200. At 70, the gain remains USD700, while stock alone would have gained USD2,000. The formula describes economic expiry value; it does not promise whether shares are delivered exactly at the strike boundary.
Background source: OIC: covered-call structure and expiry gain/loss
| Expiry stock USD | Stock-only P&L USD | Covered-call total P&L USD |
|---|---|---|
| 0 | −5,000 | −4,800 |
| 40 | −1,000 | −800 |
| 48 | −200 | 0 |
| 50 | 0 | 200 |
| 55 | 500 | 700 |
| 70 | 2,000 | 700 |
Do not confuse premium with downside protection
If the stock becomes worthless, the position loses USD4,800 under these assumptions. The USD200 premium is a limited buffer, not a floor under the share price. Selling a call also commits you to the possibility of selling the shares at 55 rather than retaining unlimited upside.
USD2 divided by USD50 is 4% premium relative to stock cost. It is not a guaranteed profit, annual yield or repeatable monthly return. A premium can be larger because the market prices more uncertainty. The chart shows both stock-only and covered-call expiry outcomes so the trade-off stays visible.
Before expiry, the option is not just intrinsic value
An option’s market price can include time value as well as intrinsic value. Time remaining, volatility, underlying price and other pricing inputs affect what it costs to close. The expiry formula must not be used as a live buyback quote. American-style short calls can also be assigned before expiry.
If your stock cost was different from 50, distinguish historical gain from the incremental decision to write a call at today’s price. The example’s displayed breakeven is based on its stated stock purchase and option cash flows; it is not a tax-cost adjustment or a guarantee that the shares can be sold there.
Background source: OIC: intrinsic and time value in option pricing
Decide whether selling the shares is acceptable
Before considering a covered call, identify which shares and how many you are prepared to deliver, the strike, expiry, acceptable trade-off and monitoring plan. If keeping the shares is non-negotiable, the short call conflicts with that objective. Closing may cost more than the premium collected.
The next guide separates sell-to-open, buy-to-close and a buy-write. These are conceptual order examples, not broker-specific instructions. Numbrite does not place options orders or track option liabilities in DividenNote; use the manual payoff worksheet to understand the position first.
Download the learning data and worksheets
Put it into practice
Check the six expiry scenarios before studying how the stock and short-call orders are opened or closed.
Read opening and closing order examples