Covered Call
A covered call holds long stock and sells an out-of-the-money call against it — an income-enhancement strategy that collects premium in exchange for capping upside above the short strike.
- Max profit
- 1300
- Max loss
- -9700
- Breakeven(s)
- 97.0
When to use
Use when you already own shares and expect the stock to trade sideways to modestly higher. The sold call generates income that cushions small declines, but you forfeit gains above the strike if the stock rallies hard.
Risk profile
Downside risk mirrors long stock ownership, offset partially by the premium collected. Maximum profit is capped at the short call strike plus the premium received. The position begins losing money below the stock purchase price minus the premium.
FAQ
What happens if the stock rises above the short call strike?
Your shares will likely be called away (assigned) at the short strike. You still keep the premium collected, so your effective exit price is the strike plus the premium — you simply miss any gains above that level.
Does a covered call protect against a large drop?
Only partially. The premium collected reduces your net cost basis by a small amount, but it does not meaningfully offset a large decline. For downside protection you need a collar (adding a long put) or a protective put.
How often should I roll a covered call?
Many traders sell monthly calls (30–45 DTE) and roll them when the short call has lost most of its time value (often around 21 DTE). Rolling involves buying back the short call and selling a new one at a later expiry, collecting additional premium.