Covered Call Calculator

A covered call is an options strategy where you own shares of the underlying stock and sell call options against those shares. This strategy generates additional income from your stock holdings while potentially limiting upside gains beyond the strike price.

When to use this calculator:

  • When you already own stock and want to generate additional income
  • When you're willing to sell your shares at a predetermined price (the strike price)
  • When you have a neutral to slightly bullish outlook on the stock
  • When you want to reduce your cost basis in a stock position
  • When you want to calculate potential returns and break-even points

Options Strategy Calculator

Calculate P&L for various options strategies

Understanding Covered Calls

Strategy Basics

A covered call consists of two parts:

  • 1. Long Stock Position: You own shares of the underlying stock (typically 100 shares per option contract)
  • 2. Short Call Option: You sell call options against your owned shares, collecting premium

Key concept: By selling call options, you're agreeing to sell your shares at the strike price if the stock price exceeds that level by expiration. In return, you collect premium upfront regardless of what happens to the stock price.

Calculator Fields

  • Stock Price:

    The current market price of the underlying stock.

  • Shares Owned:

    Number of shares you own (typically in multiples of 100).

  • Call Strike Price:

    The price at which you're obligated to sell your shares if the option is exercised.

  • Call Premium:

    The amount you receive per share for selling the call option.

  • Contracts:

    Number of call option contracts to sell (typically 1 contract per 100 shares).

Results Explained

  • Premium Received:

    The total cash received from selling the call options (premium per share × 100 × number of contracts).

  • Max Profit:

    The maximum potential gain if the stock rises to or above the strike price. Includes both the premium received and any appreciation from current stock price to strike price.

  • Break-Even:

    The stock price at which you will neither gain nor lose money. Calculated as your stock purchase price minus the premium received per share.

  • Max Loss:

    The maximum potential loss if the stock price falls significantly. Calculated as current stock value minus premium received.

  • Return Percentage:

    The return on investment if the strategy achieves its maximum profit, expressed as a percentage of the current stock value.

Strategy Advantages

  • Generates income from existing stock positions
  • Reduces cost basis of stock holdings
  • Provides some downside protection (equal to premium received)
  • Can be repeated over time for additional income
  • Particularly effective in flat or slightly rising markets
  • Can be used with dividend stocks for enhanced yield
  • Less risky than many other options strategies
  • Can be part of a systematic income generation approach

Strike Price Selection

The strike price you choose affects your potential outcomes:

  • In-the-money (ITM): Strike below current stock price. Higher premium but higher likelihood of assignment
  • At-the-money (ATM): Strike near current stock price. Balance of premium and assignment probability
  • Out-of-the-money (OTM): Strike above current stock price. Lower premium but lower likelihood of assignment

Expiration Selection

The expiration date affects time value and risk:

  • Shorter-term: Less premium but faster time decay and less exposure to price movements
  • Longer-term: More premium but slower time decay and more exposure to price movements
  • Monthly income: Many investors use 30-45 day expirations for regular income

Important Considerations

  • If the stock price rises significantly above the strike price, you'll miss out on those gains beyond the strike price.
  • Covered calls provide only limited downside protection (equal to the premium received).
  • If you want to keep your shares, you may need to buy back the call (potentially at a loss) if the stock rises above the strike price.
  • Consider dividend dates when selling covered calls, as the buyer may exercise early to capture dividends.
  • Tax considerations: Selling covered calls can affect the holding period of your stock for tax purposes.

Ideal Market Conditions

Covered calls tend to perform best in these market environments:

Neutral Markets

When stock price stays relatively flat, you keep the premium with minimal impact on shares.

Slightly Bullish

Stock rises to but not far above strike price, maximizing your return.

Decreasing Volatility

When market volatility declines after you've sold calls, making them less valuable.