An options position where someone who already owns shares sells a call option on those same shares, capping the upside in exchange for the premium received.
Published by Quintessentia Network Inc. · Updated 17 July 2026 · Sources & disclosures
Maximum proceeds per share if assigned = strike + premium received; breakeven on the shares = purchase price - premium received
What it is
A call option gives its buyer the right to buy a stock at a set price (the strike) until a set date. A covered call is when someone who already owns the underlying shares sells such a call against them. The shares are the "cover": if the buyer exercises, the seller delivers stock already held rather than having to buy it at market. The seller keeps the premium — the price the buyer paid — no matter what happens next, but has given up the right to any gain above the strike for the life of the option. One standard equity contract normally covers 100 shares.
Why it matters
It is one of the first options structures a beginner encounters, and it is widely — and misleadingly — described as "income." The premium is real cash, but it is compensation for surrendering upside, not a free addition to a stock position. The downside is essentially unchanged: if the shares fall, the holder absorbs the loss, cushioned only by the premium collected, and if they fall to zero the loss is the whole purchase price less that premium. Understanding a covered call teaches the core options trade-off: every premium received is payment for an obligation accepted. It also frames the contrast with an uncovered (naked) call, written by someone who holds no shares at all, whose potential loss is theoretically unlimited.
How it's calculated
There is no published figure. The premium is set by the options market — the price at which a call with a given strike and expiry actually trades, quoted per share and multiplied by the contract size, normally 100 shares. It is shaped by the gap between the stock price and the strike, the time left to expiry, interest rates, expected dividends, and how much movement in the stock market participants expect. Implied volatility is not a separate ingredient: it is the volatility figure backed out of the option's own traded price, a reading taken from the premium rather than a driver of it.
Cross-border note. Listed equity options in both countries use a standard 100-share contract, but Canadian-listed options trade on the Bourse de Montreal and clear through the Canadian Derivatives Clearing Corporation in Canadian dollars, while US-listed options clear through the Options Clearing Corporation in US dollars. On a share listed in both, market and currency are choices separate from strike and expiry.
FAQ
Is a covered call free income?
No. The premium is real money received, but it pays for something given up: any gain above the strike. If the stock rises well past the strike, the shares are likely called away and the seller keeps only the strike plus the premium, missing the rest of the move. If the stock falls, the loss on the shares is nearly the same as simply owning them — the premium offsets only a limited part of it. Nothing about the structure makes the outcome safe or assured.
What is the difference between a covered call and an uncovered (naked) call?
The cover. A covered call seller already owns the shares that would be delivered on exercise, so upside is capped at the strike while the downside stays that of holding the stock — up to its full value if it falls to zero, less the premium. An uncovered writer owns no shares and must buy them at the market price to deliver. Because a stock has no theoretical ceiling, the loss on an uncovered call is theoretically unlimited. Different risks, not variations on a theme.
What happens if the option expires without being exercised?
The contract lapses, the obligation ends, and the seller keeps both the shares and the premium. This typically happens when the stock is below the strike at expiry, since the buyer gains nothing by exercising a right to buy above the market price. Most listed equity options are American-style, meaning they can be exercised at any point up to expiration, so assignment is possible before the final day rather than only on it.