Glossary
Covered Call
Selling a call option against shares already owned, collecting premium in exchange for capping the upside above the strike.
A covered call is an options position in which you own at least 100 shares of a stock and sell one Call option against them. The buyer of the call pays you a premium up front; in return, you agree to sell your shares at the Strike price if the buyer exercises. The shares "cover" that obligation, so the position carries no more downside than owning the stock alone.
How the payoff works
Break-even at expiry is the share cost minus the premium, here $48.80. Maximum profit is capped at (strike − share cost + premium) × 100, here $620.
The trade-off
The strategy turns some of a stock's possible upside into income now. It tends to do best when the stock drifts sideways or rises modestly, and worst relative to just holding when the stock jumps well past the strike. It offers only a thin cushion against a large drop. Selling calls closer to the current price brings in more premium but caps gains sooner.
Things to know
You can be assigned early, especially just before an Ex-dividend date. If assignment happens in a taxable account, the sale is a taxable event. Many brokers allow covered calls at the lowest options approval level, but the position still needs a brokerage account approved for options.