Glossary · Assignment & Covered Calls · C
Covered call in plain English.
Selling a call option against 100 shares you already own. You collect a premium now and agree to sell your shares at the strike price if the stock is above it at expiration — the shares cover the obligation.
Track
Assignment & Covered Calls
4 terms in this track
Taught in
How a covered call works
In the index
25 of 100
Filed under C
Connections
8
Related terms mapped below
01
The idea, in context
How to read the picture above and where the Academy teaches it.
Reading the illustration
A covered call caps the upside at the strike in exchange for the premium; the dashed line is the shares alone.
In French: Call couvert
Where it’s taught
Assignment & Covered Calls
How a covered call works
“How a covered call works” introduces this term with worked examples, a quiz and the trades around it. The Academy is part of the YieldCove membership.
02
How it works in the wheel
Where this idea fits in the cash-secured put → covered call cycle.
The covered call is the second leg of the wheel. Once a cash-secured put is assigned and you own the shares, you sell one call per 100 shares, usually at a strike above your cost basis so a sale locks in a profit.
Each premium you collect lowers your effective cost basis further. If the stock stays below the strike, the call expires worthless and you sell another one next cycle.
If the stock finishes above the strike, your shares are called away: you sell them at the strike, keep every premium collected along the way and the wheel returns to its first leg with fresh cash.
Run your own numbers
Try your own stock, strike and premium in the free covered call calculator — no account needed.
Try it in the covered call calculatorRelated terms
03
Worked example
Illustrative numbers, before commissions and taxes. Not a recommendation.
Selling a $52 call on shares bought at $48.80
- You own 100 XYZ shares with a cost basis of $48.80 (assigned at $50 after collecting a $1.20 put premium). XYZ now trades at $49.
- You sell 1 call with a $52 strike, 30 days out, for $0.90 — $90 in premium. Your cost basis on the shares drops to $47.90.
- XYZ below $52 at expiration: the call expires worthless. You keep the shares and the $90, and can sell another call.
- XYZ at $55 at expiration: your shares are called away at $52. Your total profit is (52 − 48.80 + 0.90) × 100 = $410 — but the $300 of gains above $52 went to the call buyer.
The takeaway
A covered call turns a stock you hold into an income stream, at the price of a capped upside: the most you can make is the strike minus your cost basis, plus the premium.
04
Risks and FAQ
What can go wrong, and the questions traders ask most.
Risks to respect
- Capped upside. If the stock rallies far past your strike, you still sell at the strike. Missing a big move is the real cost of the premium.
- Downside stays open. The premium cushions a drop only by its own size; below your breakeven you lose like any shareholder.
- Strikes below your basis lock in losses. Selling a call under your cost basis collects more premium but can force a sale at a loss if the stock rebounds.
- Early assignment around dividends. Calls in the money just before an ex-dividend date can be exercised early, and you lose the dividend.
Frequently asked questions
Why is it called a covered call?
Because the 100 shares you own cover the obligation to deliver stock if the call is exercised. A call sold without the shares is a naked call, which carries unlimited risk.
What happens if my covered call finishes in the money?
Your shares are sold at the strike price, usually over the weekend after expiration. You keep the premium and the cash from the sale. If you want to keep the shares, you can roll the call before expiration.
Which strike should I choose for a covered call?
In the wheel, most traders pick a strike at or above their cost basis, often around 0.20–0.35 delta. Higher strikes keep more upside but pay less premium.
Do covered calls reduce risk?
Only a little. The premium lowers your breakeven, but you still carry almost all of the stock's downside while giving up gains above the strike.
05
Connected terms
8 terms around this one — the words its definition uses, its lesson siblings and the terms that build on it.
- Used in this definition
- Same lesson
- Builds on this term
- Same track
06
Where to go next
Understand it, try it with real numbers, then track it for free.
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