Covered Call Calculator

A covered call combines a long stock position with a short call option—you own 100 shares of stock for each call you sell. It's a neutral-to-moderately-bullish strategy that generates income through premium collection while capping your upside if the stock rallies past the strike price. Covered calls are one of the most popular options strategies for stockholders looking to enhance returns on shares they already own.

Key Characteristics

• Maximum Profit: (Strike price - stock entry price + premium) x 100 x quantity
• Maximum Loss: (Stock entry price - premium) x 100 x quantity (if stock goes to $0)
• Breakeven: Stock entry price - premium received
• Best Used When: You own shares and would be comfortable selling at the strike price. Ideal for generating income on long-term holdings, reducing cost basis, or setting a target exit price while getting paid to wait.

How to Read the P/L Chart

The expiration line (white) shows your profit or loss if you hold the position until expiration. For covered calls, profit increases as the stock rises until you hit maximum profit at the strike price—above the strike, profit is capped since your shares will be called away. Below your breakeven, losses begin.

The T+0 line (cyan) shows your theoretical P/L at the time of entry—if the stock moved to various prices on day one, this line shows your expected result. The gap between the T+0 and expiration lines represents the profit you'll earn from theta decay as the short call loses extrinsic value over time. This is the "time value" you're collecting as the option seller.

The stock comparison line shows the P/L of simply holding shares without selling the call. This highlights the core tradeoff: if the stock rallies above the strike, you'll underperform since your profit is capped while the stock-only position keeps climbing. But at every price below your call strike + premium received, the covered call outperforms. The covered call sacrifices unlimited upside for income potential and downside cushion.

Note: This tradeoff assumes an OTM or ATM call. If you sell a deep ITM call, you're essentially locking in a sale—both the covered call and stock-only positions will have similar P/L curves until the stock falls below the strike. Selling a deep ITM call against stock is synthetically the same as selling a deep OTM put at the same strike price. Try it in the calculator above to see for yourself.

Using This Calculator

1. Stock Price: Current stock price at the time of entry (your cost basis for the shares)
2. Strike Price: The price at which you are obligated to sell your shares if assigned
3. Premium: Credit received for selling the call (option price x 100 x number of contracts for total credit)
4. Days to Expiration: Time remaining until expiration
5. Implied Volatility: The market's expectation of future price movement—higher IV means higher premiums
6. Quantity: Number of covered call units. Each unit = 100 shares of stock + 1 short call. Selling 5 covered calls means you own 500 shares and are short 5 call contracts.
7. Cash Requirement: The net capital invested—cost of shares minus premium received. If you buy 500 shares at $100 and sell 5 calls for $2.50 each ($250 premium each), your cash requirement is $50,000 - $1,250 = $48,750.
8. If Called (Max Profit): Your profit if the stock finishes at or above the strike at expiration. Shown as dollars and percent return on your cash requirement.
9. If Flat (Premium Only): Your profit if the stock price stays unchanged—this is the premium yield on your cash requirement. Useful for comparing covered call opportunities.

Why Use Covered Calls?

• Income Generation: Collect premium immediately while holding shares—works even if the stock doesn't move. The cash from selling calls can be withdrawn once settled, though it's not locked-in profit until the call expires or is closed for a profit, which you'll need available cash to do.
• Lower Breakeven: The premium received reduces your effective cost basis, giving you a cushion against small stock price declines.
• Time Decay Advantage: Theta works in your favor as the option seller—the call loses value every day. During flat periods, this allows covered calls to outperform buy-and-hold stock positions.
• High Probability of Profit: Selling OTM calls means you profit in most scenarios—stock down slightly, flat, or up to the strike.
• Defined Exit: If assigned, you sell at a price you already chose—no emotional decision-making required.
• Lower Risk Than Stock Alone: Your breakeven is below the current stock price, so you're better off than a pure stockholder in flat or down markets.

When to Avoid Covered Calls

• Strong Bullish Conviction: If you expect a significant rally, the capped upside means you'll leave money on the table.
• Before Earnings or Major Events: High-premium opportunities are tempting, but you risk missing a big move or getting assigned at an inopportune time.
• Stocks in Freefall: The premium provides a small cushion, but it won't save you from a major selloff—don't use covered calls to "rescue" a losing position.
• Shares You Don't Want to Sell: If you'd be upset to have shares called away (tax implications, emotional attachment), either sell a higher strike or skip the trade.
• During a stock decline when you think the stock may recover: If the stock plummets and you think a recovery is coming, selling calls to cap your upside could be a bad trade.

Covered Call Tips

• Strike Selection: OTM calls (above current price) give more upside room but smaller premiums. ATM calls maximize premium but cap gains immediately. Choose based on your outlook.
• Expiration Selection: 30-45 DTE is a common sweet spot—enough premium to be worthwhile, but theta decay accelerates as expiration approaches. Longer expirations (90-120 DTE) will allow you to sell higher strikes for equal or higher premiums than shorter-dated calls at lower strikes.
• Rolling: If the stock rallies toward your strike, you can "roll" the call up and out (buy back the current call, sell a higher strike with more time) to capture more upside. Depending on the roll, you may be able to capture even more premium.
• Dividends: Be aware of ex-dividend dates. ITM calls may be exercised early to capture dividends, resulting in early assignment.