Covered Call Profit Explained

The Covered Call Strategy

A covered call consists of owning 100 shares of stock and selling one call option against it. This is a primary strategy for generating yield from a long-term stock position.

Profit Mechanics

• Premium Received: You collect cash immediately for selling the call.
• Downside Protection: The premium lowers your cost basis by the amount received.
• Profit Cap: Your max profit occurs at the strike price; you do not benefit from further stock gains.

FAQ: Covered Calls

What happens if the stock price crashes?

You still own the stock. While the premium offers a small "buffer," you are still exposed to significant downside risk of the shares.

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