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Glossary

Covered Call

A covered call is an options strategy in which an investor who owns shares sells a call option on them to collect premium, accepting an obligation to sell at the strike price if exercised.

What Is a Covered Call?

A covered call is an options strategy in which an investor who already owns shares of a stock sells a call option on those same shares. The seller receives a payment called an option premium from the buyer. In return, the seller agrees to sell the shares at a fixed strike price if the buyer exercises the option before or at its expiration date.

The word "covered" means the seller already holds the shares needed to fulfill the contract. Standard U.S. stock options generally cover 100 shares per contract, so the seller does not have to buy shares at an unknown price later if the option is exercised.

How It Works

The outcome depends on where the stock trades at expiration:

  • If the stock stays below the strike price, the option usually expires worthless. The investor keeps the shares and the premium.
  • If the stock rises above the strike price, the buyer may exercise, and the investor sells the shares at the strike price. The investor keeps the premium but gives up gains above the strike.
  • If the stock falls, the premium offsets part of the decline, but the investor still owns shares that have lost value.

Early exercise is possible with American-style options, so the seller can be required to deliver shares before expiration. This process is known as assignment.

Example and Trade-Offs

Suppose an investor bought shares at $50 and sells a call with a $55 strike price for a $2 premium per share. The breakeven price, ignoring commissions and taxes, is the purchase price minus the premium:

Breakeven = purchase price − premium received

Here, breakeven is $48. If the stock finishes at or above $55, the maximum gain is the strike gain plus the premium, or $7 per share.

Covered calls can generate regular income and provide a small cushion against modest price declines. However, they cap potential upside above the strike price, and the premium offers only limited protection if the stock drops sharply. Investors also remain exposed to the full downside risk of the underlying shares.

Updated October 18, 2026. For general education only; not financial, tax or legal advice.

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Related Terms

Call Option

A call option is a contract that gives its buyer the right, but not the obligation, to buy a specified quantity of an underlying asset at a set price before or on a set expiration date.

Option Premium

The option premium is the price a buyer pays the seller to acquire an options contract, which the seller keeps whether or not the option is exercised.

Strike Price

The strike price is the fixed price at which the holder of an option can buy or sell the underlying asset, such as a stock, when the option is exercised.

Expiration Date

The expiration date is the last day on which a derivative contract, such as an option or futures contract, remains valid and can be exercised, after which it becomes void.

Assignment

In options trading, assignment is the notification that an option seller must fulfill the contract, by delivering or buying shares, after the option buyer chooses to exercise.

Put Option

A put option is a contract that gives the buyer the right, but not the obligation, to sell a specified amount of an underlying asset at a set price before or on a set expiration date.

Naked Call

A naked call is an options position in which an investor sells a call option without owning the underlying stock or holding an offsetting option that limits the risk.

Cost Basis

Cost basis is the original value of an asset for tax purposes, usually its purchase price plus certain costs, used to work out the capital gain or loss when the asset is sold.