Understand the position
Buy 100 shares at $100 and sell one $105 call for $3 per share. Initial stock cost is $10,000; premium received is $300. The call is covered because the investor owns the 100 deliverable shares. Selling more calls than the stock covers creates a different exposure.
At expiration, maximum combined profit is ($105 − $100 + $3) × 100 = $800. Break-even is $97. If the shares become worthless, combined loss is $9,700. Receiving $300 does not make the full position low risk.
Read the payoff and try a scenario
Covered call: profit and loss at expiration
- Buy 100 shares at $100; sell one $105 call for $3 per share.
- Expiration break-even stock price: $97 before costs.
- The plot displays $70–$130 only. Move the control to $0 to examine a stock collapse; the right edge is not an upside bound.
Read the chart data
| Stock price at expiration · USD | Whole position P/L (Net P/L · USD per share) |
|---|---|
| 70 | -27 |
| 80 | -17 |
| 90 | -7 |
| 97 | 0 |
| 100 | 3 |
| 105 | 8 |
| 110 | 8 |
| 120 | 8 |
| 130 | 8 |
One contract per option leg; 100 shares where the strategy includes stock. Read the fixed position above before changing the price.
At stock $90, the call expires worthless but the shares lose $1,000; the $300 premium leaves a $700 loss. At $120, the shares’ gain is offset above $105 by the short call, leaving the same $800 maximum profit. The flat right-hand line shows the upside traded away.
Separate expiration economics from live prices
The diagram calculates net profit or loss at expiration with the specified position intact. Before that date, remaining time, implied volatility, rates, dividends and bid–ask spreads affect each leg’s market value. A break-even shown here is an expiration break-even, not the price at which an early closing trade must be profitable.
For an actual position, calculate net execution costs and contract quantities, and verify every leg’s expiration, underlying and deliverable. The examples use one standard 100-share contract per leg. Adjusted contracts can differ; an incomplete or mismatched hedge changes the risk.
Understand the tradeoffs and obligations
The dominant downside remains the shares. Compare the small premium cushion with the possible stock decline. The calculation uses a new $100 purchase; an existing holding needs its own cost basis and a clear starting point for evaluating results.
American-style calls can be assigned early, including around ex-dividend dates. The shares may be called away and an expected dividend lost. Buying back the call can be expensive after a rally. “Covered” describes the delivery coverage, not protection from a market decline.
The stock falls to $90. Does keeping the $300 premium mean the covered call made money?
Show the explanation
No. The stock loses $1,000, so the whole position loses $700 after the premium, before costs.
Sources and editorial notes
Original explanations and hypothetical examples prepared with AI assistance. Primary reference check dates are listed below. Numerical examples are hypothetical unless explicitly identified otherwise.
- OCC / OIC: Covered Call
Position construction and risk tradeoffs. All premiums, strikes, payoff graphics, practice questions and calculations are original fictional examples, not copied charts or performance results. Checked October 17, 2026.
- FINRA / OCC: Understanding Assignment
Exercise, assignment, after-hours risk and broker cutoff considerations. Strategy diagrams assume intact matching positions through settlement. Checked October 17, 2026.