Covered Call
Overview
A covered call involves selling a call option against shares you already own. It's called "covered" because your stock ownership covers the obligation to deliver shares if assigned.
Setup
- Own 100 shares of the underlying stock
- Sell 1 call option (typically OTM)
Risk/Reward Profile
| Max Profit | Strike Price - Stock Price + Premium Received |
| Max Loss | Stock Price - Premium Received (if stock goes to zero) |
| Breakeven | Stock Purchase Price - Premium Received |
Example
You own 100 shares of XYZ at $50. You sell a $55 call for $2.00.
- Max Profit: ($55 - $50) + $2 = $7/share = $700
- Breakeven: $50 - $2 = $48
- Max Loss: $48/share if stock goes to zero
When to Use
- You own shares and are neutral to slightly bullish
- You want to generate additional income from your holdings
- You're willing to sell shares at the strike price
Pros and Cons
| Pros | Cons |
|---|---|
| Generate income from existing holdings | Limited upside if stock rises sharply |
| Provides some downside cushion | Still exposed to significant downside risk |
| Simple strategy, easy to understand | May result in selling shares at inopportune time |