options strategy
Covered Call
Generate income from shares you already own by selling a call against your position.
Max profit
(Strike − cost basis) + premium
Max loss
Cost basis − premium (stock falls to zero)
Breakeven(s)
Cost basis − premium received
What is a covered call?
A covered call means you own 100 shares of a stock and sell one call option against them. The call is 'covered' because you own the shares that would be delivered if the buyer exercises.
You collect the premium immediately. In exchange, you give up the right to profit above the strike price. If the stock closes above the strike at expiry, your shares are called away at the strike. If it closes below, you keep the shares and the premium.
When to use it
Covered calls suit investors who are neutral-to-mildly-bullish on a stock they already own, and who are comfortable selling their shares at the strike price. The strategy is most effective when implied volatility is elevated — you collect more premium.
Avoid covered calls if you expect a large upside move, since the strategy caps your gains at the strike. They are also less effective in very low-IV environments where the premium generated is minimal.
Construction
1. Own (or buy) 100 shares of the underlying stock
2. Sell 1 OTM call with your target strike and expiry
The strike you choose determines the trade-off: higher strikes give more upside room but less premium; lower strikes generate more premium but cap gains sooner.
Profit, loss, and breakeven
Max profit: achieved if the stock closes at or above the strike. You receive (strike − cost basis) per share plus the premium collected.
Max loss: if the stock goes to zero, your loss is the cost basis of the shares minus the premium received. The premium provides a small buffer.
Breakeven: cost basis per share minus the premium received. Below this price you're in a net loss on the trade.
Key risks
The primary risk is a large drop in the underlying. The premium collected only partially offsets a significant decline — this is not a hedging strategy.
Upside risk: if the stock surges well above the strike, your gains are capped. You keep the premium and sell at the strike but miss the additional move.
Early assignment can occur with American-style equity options, particularly around ex-dividend dates.
Model it yourself
Open the Vega Lab dashboard, enter a ticker, and load a live option chain to build a covered call with real strikes and premiums. The payoff chart and heatmap update in real time as you adjust each leg.
Open dashboard →