A covered call sells a call against 100 owned shares, collecting premium in exchange for capping upside at the strike. If the stock finishes above the strike the shares are called away at that price; below it, the premium is kept and the shares remain.
A covered call pairs 100 owned shares with one sold call. The call's premium is income on the shares, and the shares cover the obligation: if the call is exercised, they are delivered at the strike. The trade gives up gains above the strike in exchange for the premium today.
100 shares of a $50 stock, bought at $50. With 35 days to expiration and a flat 32% implied volatility (model prices), selling the 52.50 call collects about $1.08.
| Stock at expiration | What happens | Shares plus call |
|---|---|---|
| $45 | Call expires worthless | -$392 |
| $48.92 | Call expires worthless | $0 |
| $50 | Call expires worthless | +$108 |
| $52.50 | Call expires worthless | +$358 |
| $60 | Shares called away at $52.50 | +$358 |
At $60 the shares alone would have made $1,000. The $642 difference is the upside the call gave up.
The discipline that keeps covered calls honest is not selling strikes below what the shares cost. Assignment below cost turns a paper loss into a realized one for a small, certain premium. Within the wheel, covered calls are written on shares received from an assigned cash-secured put, so the floor is the put's breakeven.
US equity options can be exercised any time before expiration. Early assignment of a covered call is most likely when the call is deep in the money with little time value left, and especially the day before an ex-dividend date, when the call's owner may exercise to collect the dividend. The mechanics are in dividends and options.
At the same strike and expiration, a covered call and a cash-secured put have nearly the same payoff: both keep the premium if the stock finishes above the strike and both lose like stock below it. The difference is the starting point. One begins with shares, the other with cash. How the app selects covered calls, including the cost-basis floor, is in the covered call screener.
The strike minus the share cost plus the premium, times 100. Shares bought at $50 with a 52.50 call sold for $1.08 can make at most $358 per contract, reached at or above $52.50.
The 100 shares are sold at the strike and the premium is kept. Early assignment is most likely when the call is deep in the money with little time value left, or the day before an ex-dividend date.
Only by the amount of the premium. Below the breakeven, the share cost minus the premium, the position loses like owning the shares.