What is a covered call?
A covered call has two parts. You hold 100 shares of a stock, and you sell one call option against them. The call is covered because those shares can be delivered if the buyer exercises.
The premium is yours to keep. In exchange you give up any gain above the strike you sold. It is the simplest way to turn a share position into an income position.
When traders use it
Traders sell covered calls when they are mildly bullish or flat on a stock they already hold.
- You expect the share price to drift sideways or rise a little, not to run.
- You want income from a position you plan to hold anyway.
- You are happy to sell the shares at the strike if the stock gets there.
The P/L shape
Profit rises with the stock until the strike, then goes flat. Loss below is the stock's loss, cushioned by the premium.
Worked example. XYZ trades at $100. You own 100 shares and sell the $105 call for $2.00, a credit of $200.
- Max profit
- $700 — $500 of share gain to $105, plus the $200 credit
- Max loss
- $9,800 — the shares to zero, less the credit
- Breakeven
- $98.00 — cost basis minus the premium
Above $105 the shares are likely called away and the result is the same $700 whether the stock finishes at $106 or $160. That cap is the trade-off you are accepting.
Greeks and time decay
The short call carries negative delta, so the position is less bullish than the shares alone. A 100-share position starts at +100 delta; selling a 30-delta call takes it to about +70.
Theta works for you. The short call decays every day the stock sits still, and that decay accelerates in the final weeks. Vega is negative: a drop in implied volatility makes the call cheaper to buy back.
Build it in DeltaForm
- Open the builder and pick the underlying you hold.
- Add a stock leg of 100 shares at your cost basis.
- Add a short call leg, then set the strike and expiration.
- Read the payoff curve — the flat shelf to the right is your cap.
- Move the date forward to see how much theta you collect before expiration.
Frequently asked questions
What happens if the stock closes above the strike?
The call is likely exercised and your 100 shares are sold at the strike. You keep the premium and the share gain up to that strike. DeltaForm models the outcome; it does not connect to a broker or handle the assignment.
Is a covered call safer than owning the stock?
It is less risky by exactly the premium you collected. The downside is still the whole share position. A $2.00 credit moves your breakeven from $100 to $98 and no further.
Which strike should I sell?
Closer strikes pay more premium and cap you sooner. Further strikes pay less and leave more room. Model two or three strikes side by side and compare the curves before you choose.