Covered Call Strategy — Guide, Income & Calculator

A covered call is an income-generating strategy that involves owning 100 shares of stock and simultaneously selling a call option against those shares. This creates regular income from option premiums while maintaining most upside participation, with capped profit potential.

Use the interactive chart below or jump to the setup guide to understand strike selection and income optimization for your existing holdings.

Interactive Payoff Chart

When to Use Covered Calls

• Outlook: Neutral to moderately bullish; comfortable with capped upside.
• Income generation: Seeking regular cash flow from existing stock positions.
• Volatility: High IV environments provide better premium collection.
• Holdings: Own or willing to own the underlying stock long-term.

Setup: Strike Selection & Expiration

Prerequisites

Own 100 shares of the underlying stock (or be willing to purchase at current levels).

Strike Selection

1. Out-of-the-money (OTM): Higher strikes allow more upside but less premium.
2. At-the-money (ATM): Maximum premium but limits upside potential.
3. Target-based: Choose strikes where you'd be happy to sell shares.
4. Delta consideration: 0.15-0.30 delta strikes balance income and upside.

Expiration

• 30–45 DTE optimizes time decay and premium collection.
• Avoid earnings dates unless seeking higher premium.
• Consider dividend dates that may trigger early assignment.

Income Optimization

Target 1-2% monthly income relative to stock value. Balance premium income with acceptable upside cap based on your outlook.

Want to optimize strikes? Try the Covered Call Calculator to compare income vs. upside potential across strikes.

Payoff, Breakeven & Greeks

• Max Profit: (Strike - stock cost) + premium received.
• Max Loss: Stock cost minus premium (if stock goes to $0).
• Breakeven: Stock cost minus premium received.

Greeks (net position)

• Delta: Positive but reduced; gains from stock price increases.
• Theta: Positive; benefits from time decay on short call.
• Vega: Negative; hurt by rising implied volatility.
• Gamma: Negative; delta decreases as stock price rises.

Management & Assignment

• Profit taking: Close call when 75-90% of premium is captured.
• Rolling: Roll to next expiry if wanting to keep shares and generate more income.
• Assignment: Be prepared to sell shares at strike—this can be a profitable outcome.
• Early assignment: Monitor before ex-dividend dates and earnings.

Adjustment Techniques

• Rolling up: If stock rises, roll to higher strike for more upside.
• Rolling out: Extend time to collect more premium and avoid assignment.
• Buy-to-close: Close call to capture unexpected upside moves.

Worked Example (Illustrative)

Own 100 shares of XYZ at $50. Sell one $55 call for $2.00 with 30 days to expiration.

• Max profit: $7.00 per share if stock ≥ $55 ($5 gain + $2 premium).
• Downside protection: Break even at $48 ($50 - $2 premium).
• Income yield: 4% for 30 days ($2/$50).

If XYZ stays below $55, keep the $200 premium and shares. If called away, earn maximum profit. Use the calculator to model different scenarios.

Frequently Asked Questions

Disclaimer

This page is for educational purposes only and is not investment advice. Options involve risk and are not suitable for all investors. Consider consulting a qualified professional. Examples are illustrative and exclude fees/slippage.

Sources & further reading: Cboe Options Education · OCC Investor Resources