What a covered call pays
A covered call is a call option sold against shares you already own, 100 shares per contract. You collect the premium now. In return you give up any rise above the strike: if the shares finish above it at expiry, they are called away at the strike price.
There are two returns worth knowing, and most calculators only show one:
- Static return is what you make if the share price does not move: the premium divided by the share price.
- Return if called is the best case: the premium plus the rise to the strike, divided by the share price.
static return = premium ÷ share price
if-called return = (strike − share price + premium) ÷ share price
breakeven = share price − premium
A worked example
With the figures loaded above, the shares trade at $50 and you sell one 30-day call at a $52.50 strike for $0.80.
- Premium collected is $0.80 × 100 = $80.
- Static return is $0.80 ÷ $50 = 1.60% in 30 days, about 19.5% a year simple.
- Return if called is ($52.50 − $50 + $0.80) ÷ $50 = 6.60%, about 80.3% a year simple. That is the ceiling, and it needs the shares to rise at least 5% in a month.
- Breakeven is $50 − $0.80 = $49.20. The premium protects you against a 1.6% fall and no more.
If you bought the shares at $46, being called away at $52.50 also locks in the gain on the shares: $52.50 − $46 + $0.80 = $7.30 a share, $730 in total. If you bought them above the strike, being called away locks in a loss, and the calculator warns you.
The trade you are really making
The premium is real income, but it is paid for. Below the strike you keep every dollar of downside, less the premium. Above the strike you give away every dollar of upside. A covered call therefore has almost exactly the payoff of a cash-secured put at the same strike: limited gain, nearly all the loss. The covered calls guide walks through that equivalence and when the trade makes sense.
- Closer strikes pay more and cap sooner. An at-the-money call might pay three times the premium of one 5% out of the money, and you give up the whole rise.
- Annualised figures assume repetition. 19.5% a year means twelve months in a row at the same premium with no losses. A single month tells you little about the year.
- Dividends and early exercise. An in-the-money call is most likely to be exercised early just before an ex-dividend date. If you want to keep the dividend, check the calendar.
- Taxes. Being called away is a sale. Where that creates a taxable gain depends on your country and how long you held the shares.
To see how the position behaves before expiry, or to compare a covered call with other strategies on the same shares, use the options profit calculator.