Covered Call

Own 100 shares and sell a call against them to generate income — the classic first income strategy.

A covered call pairs 100 shares you already own with a short call sold against them. You collect premium in exchange for capping your upside.

Market outlook

Neutral to mildly bullish — you think the stock drifts up slowly, trades sideways, or you simply want income and are willing to sell at a higher price.

Construction

• Own 100 shares (cost basis per share $S_0$).
• Sell 1 call at strike $K > S_0$ for premium $P$.

Risk / reward

• Max profit: $(K - S_0) + P$ realized if the stock is at or above $K$ at expiry (your shares get called away).
• Max loss: the same downside as owning the stock, reduced by $P$. Breakeven: $\text{BE} = S_0 - P$
• The premium $P$ is yours to keep no matter what.

When to use it

• On a core holding you wouldn't mind selling at $K$.
• To lower cost basis on a position you expect to stagnate.

Risks & management

• Capped upside: if the stock gaps far above $K$, you miss the excess gain.
• Still long the stock: a covered call only buffers losses by the premium — it is not downside protection.
• Common to sell ~30–45 DTE calls around the 0.30 delta and roll out/up as expiry nears.