What Is a Covered Call? Income, Capped Upside and the Full Downside
Reviewed by Leon Moyer - Published October 9, 2026 - Last reviewed October 9, 2026
In this lesson
Explain how a covered call works and state its maximum profit, maximum loss and break-even for a given stock price, strike and premium.
A covered call is an options strategy where you own 100 shares of a stock and sell one call option on them, collecting a premium in exchange for agreeing to sell those shares at the strike price if the call is exercised. It turns some of the stock's possible upside into cash today, but it leaves almost all of the stock's downside in place.
That trade-off is the whole strategy. This lesson works through it on the same trade Course 1 introduced in Why Traders Use Options, so the trade itself is one you have seen before. The examples are hypothetical and are not a recommendation to trade.
How does a covered call work?
A covered call has two parts, and you hold both at once:
- Long 100 shares. You own the stock, and you carry all of its risk.
- Short one call. You sell one call on those shares. The buyer pays you the premium for the right to buy your shares at the strike price, up to expiration.
The call is "covered" because the shares you would have to deliver are already in your account. If you sold the same call without the shares, it would be a naked call, and a stock that kept rising could cost you an unlimited amount. Owning the shares removes that risk: the worst an assignment can do is sell shares you already hold at the strike.
How a covered call works, from shares to expiration
Own 100 shares
100 XYZ bought at $48: $4,800
Sell 1 call
XYZ 52 call, 30 days: collect $80
XYZ at or below $52
Call usually expires worthless; keep shares and $80
XYZ above $52
Shares usually called away at $52: $480 total gain
The premium is yours the moment the sale fills, whatever happens next. Two things can happen by expiration:
- The stock finishes at or below the strike. The call usually expires worthless. You keep the shares and the premium, and you are free to sell another call.
- The stock finishes above the strike. The call is usually exercised, and your shares are sold ("called away") at the strike. You keep the premium and any gain up to the strike, and you give up the rest.
Worked example
A covered call on 100 XYZ at $48
Model inputs for this module: XYZ at $48, 38.6% implied volatility, 30 days to expiration, 4.5% rate. At those inputs the 52 call's model value is the $0.80 used throughout these lessons; it is not a quote.
You own 100 shares of XYZ, bought at $48 ($4,800). You sell one XYZ 52 call expiring in 30 days for $0.80 per share and collect $80.
- XYZ finishes at $50: the call expires worthless. The shares are up $200 and you keep the $80: $280 in total.
- XYZ finishes at $58: your shares are called away at $52. You make $4 a share on the stock plus the $0.80 premium: $480. A shareholder without the call made $1,000.
- XYZ finishes at $42: the call expires worthless and you keep the $80, but the shares have lost $600. The result is a $520 loss.
- XYZ goes to $0: the shares lose $4,800 and the $80 premium reduces that to a $4,720 loss.
Figures are at expiration and before commissions and fees.
Illustrative and hypothetical. The ticker and prices are invented for teaching, and the figures exclude commissions, fees, margin interest and taxes, which reduce real results. Past or hypothetical outcomes do not indicate future results.
What is the maximum profit, maximum loss and break-even of a covered call?
Each one fits in a sentence:
- Maximum profit is the strike minus what you paid for the shares, plus the premium, times 100: ($52 - $48 + $0.80) x 100 = $480. You reach it at any price at or above the strike.
- Maximum loss is what you paid for the shares minus the premium, times 100, if the stock goes to zero: ($48 - $0.80) x 100 = $4,720.
- Break-even at expiration is the share price you paid minus the premium: $48 - $0.80 = $47.20.
The Options Industry Council's covered call guide states the same formulas, and describes the maximum loss as "limited but substantial."
100 shares at $48, with and without a short 52 call
Hover or tap the chart, or focus it and use the arrow keys, to read any price.
Open this trade in the free calculatorShow as table
What is the risk of a covered call?
A covered call does not protect you from a falling stock. You still own every share. The premium is a small cushion, $0.80 on a $48 stock here, and below the $47.20 break-even you lose $100 for every dollar the stock falls, almost exactly as if you had sold no call at all.
Covered calls are often described as conservative, and compared with a naked call they are. Compared with simply owning the stock, though, they are not safer on the way down. They are the same stock position with a small amount of extra cash and a ceiling on the way up. Seen across the whole range of prices, the premium barely changes the picture.
The full covered call payoff, all the way down to $0
Hover or tap the chart, or focus it and use the arrow keys, to read any price.
Open this trade in the free calculatorShow as table
There are two other costs to keep in mind:
- Opportunity cost. If the stock jumps on good news, a takeover bid or a strong earnings report, you keep only the gain up to the strike. In the example, a move to $58 earns $480 instead of $1,000.
- Losing the shares. If you would rather keep the stock, assignment is an unwelcome outcome. You can buy the call back before then, but at a higher price if the stock has risen. What Happens When a Covered Call Is Assigned? covers both choices.
When do traders use covered calls?
The Options Industry Council's guide describes the ideal outlook as a "steady or slightly rising stock price" over the life of the option, and says the strategy does not suit a very bullish or very bearish investor. In practice traders sell covered calls when they:
- Own shares they are content to hold, but do not expect a big move soon, and want the stock to pay them while they wait.
- Have a price they would happily sell at. Selling a call at that strike gets paid for a decision already made.
- Want to set up the shares and the call together. Buying the stock and selling the call in one order is called a buy-write, covered in The Buy-Write.
Covered calls make little sense if you expect the stock to soar, because the call takes that gain, or if you expect it to fall, because the call barely cushions it. A falling stock is a reason to reconsider the shares, not to sell a call on them.
Time decay works for the seller here. All else being equal, the call loses time value as expiration approaches, which is what lets it expire worthless when the stock stays below the strike. Rising implied volatility works against you, because it makes the call more expensive to buy back.
Check your understanding
You own 100 shares bought at $60 and sell one 65 call for $1.50. What are the maximum profit, maximum loss and break-even?
Show answer
Maximum profit is ($65 - $60 + $1.50) x 100 = $650, at any price at or above $65. Maximum loss is ($60 - $1.50) x 100 = $5,850, if the stock goes to zero. Break-even is $60 - $1.50 = $58.50.
Why is the call in a covered call called covered?
Show answer
Because you already own the 100 shares you would have to deliver if assigned. That removes the unlimited risk of a naked call, but it does not remove the risk of owning the shares.
In the XYZ example, the stock falls from $48 to $40. How much did the covered call save compared with owning the shares alone?
Show answer
Only the $80 premium. The shares lose $800, so the covered call loses $720 instead of $800.
Key takeaways
- A covered call is 100 shares you own plus one call you sell on them, for a premium paid to you up front.
- Maximum profit is the strike minus your share price plus the premium; maximum loss is your share price minus the premium, if the stock goes to zero; break-even is your share price minus the premium.
- The premium is a small cushion. Below break-even you lose almost as much as a plain shareholder.
- It suits a steady or slightly rising outlook on shares you would be willing to sell at the strike.
Common questions
Can you lose money on a covered call?
Yes. A covered call still owns 100 shares, so if the stock falls you lose on them almost as much as a plain shareholder would. The premium only offsets the first part of the drop: on shares bought at $48 with $0.80 collected, any finish below $47.20 is a loss.
Is a covered call a good strategy for beginners?
It is often one of the first strategies brokers approve, because the shares cover the obligation to deliver. It suits someone who already wants to own the stock and is willing to sell it at the strike. It is not low risk: the full downside of owning the shares remains.
How much can you make on a covered call?
The most is the premium plus any gain from your share price up to the strike, times 100 shares, before fees. If the stock finishes above the strike, the shares are normally called away at the strike, so you keep that amount but not any gain above it.
Do you need 100 shares to sell a covered call?
Yes, for a standard contract. One equity option covers 100 shares, so each call you sell needs 100 shares behind it to be covered. Selling a call without the shares is a naked call, which has no fixed limit on its loss.