Snapshot
Legs
Buy 100 Shares of Stock + Sell 1 Call
Outlook
Neutral to Slightly Bullish
Max profit
Call strike price minus stock purchase price plus premium received
Max Loss
Stock purchase price minus premium received
A covered call option strategy involves holding a long position in shares of a stock while simultaneously selling a call option against those exact shares. By selling the call option, you generate immediate income from the fee collected. Investors use this strategy when they hold a neutral to slightly bullish outlook on a stock they already own and want to generate extra yield from their portfolio.
Your profit is capped at the strike price of the call option plus the fee collected, because you will be forced to sell your stock if the price rises above that strike. Your downside risk is similar to owning regular stock, though it is slightly reduced by the amount of cash collected upfront from selling the call option.
Example
Stock
$100
Trade
- Buy 100 shares at $100
- Sell $105 Call for $2.50
→ $97.50 net cost ($9,750)
Breakeven
$97.50
Outcomes
- Stock ≥ $105: +$750 Max Profit
- Stock at $97.50: $0 Breakeven
- Stock < $97.50: Stock-like Loss (e.g., -$1,250 at $85)