Covered Call

An income strategy on shares you own — capped upside, premium cushion · payoff at expiration

Worked example

Buy 100 shares at $100.00 and sell the $105.00 call for a net $9,700.00 debit — capital required $10,000.00 (the premium you collect is income, so your net cost sits below the capital tied up in the shares). Max profit $800.00, max loss -$9,700.00, breakeven $97.00.

At expiration: if the stock is at $115.00, the position shows a net P&L of $800.00; if the stock is at $90.00, the position shows a net P&L of -$700.00.

When to use

You own (or will buy) 100 shares and expect them to drift flat-to-modestly-higher, not surge.
You want to earn premium income against the shares and lower your effective cost basis.
You accept capping your upside at the short strike in exchange for the premium collected.

Common pitfalls

Your upside is capped above the short strike — a big rally leaves the extra gain on the table (you may be assigned and sell your shares).
You still carry the full downside of owning the stock, only cushioned by the premium — the position can lose heavily if the stock falls.
The premium is income, not a hedge: capital required is the share cost, and most of it is still at risk below your breakeven.