Covered Calls: Collecting Rent on Your Shares
You already hold 100 shares, so you sell 1 call to collect a premium. If the stock doesn't rise you earn extra income; if it soars, your shares get bought at the strike. You trade upside for cash.
Risk warning: forex, CFDs, options, futures and crypto assets usually involve leverage or high volatility, and you can lose more than you put in. This lesson only teaches the concepts; all numbers are for illustration and are not investment advice.
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Text version · Options: Next Steps, lesson 4: “Covered Calls: Collecting Rent on Your Shares”
You already hold 100 shares, so you sell 1 call to collect a premium. If the stock doesn't rise you earn extra income; if it soars, your shares get bought at the strike. You trade upside for cash.
“Rent out” your shares and collect rent
If you already own 100 shares, you can sell 1 Call and collect a premium up front. This is called a covered call. If the stock doesn't rise, that money is extra income.
The price: your upside is capped
If the stock rises above the strike, the buyer exercises and your shares are bought away at the strike (assignment). Maximum profit = strike − purchase price + premium; however much higher it goes is none of your business.
It's not insurance
The premium only lowers the breakeven a little. When the stock plunges you still hold it and take almost the whole loss. To protect against drops, use a protective put.
Key takeaways
- Covered call = hold 100 shares + sell 1 call, collecting the premium when you open it.
- Maximum gain = strike − purchase price + premium. Any rise beyond that goes to the call buyer.
- Breakeven = purchase price − premium. The premium only offsets a small part of a fall; it isn't insurance.
- The higher the strike, the less premium you collect, but the more upside you keep for yourself.
Try it yourself
You can do these exercises in this lesson's interactive simulation:
- Default: sell the $105 Call (collect $1.65). Click “Stock flat”: how much does the covered call make per share? And holding the stock only?
- Click “Surge to $120”: the shares are called away and the covered call makes $6.65 per share. How much does holding the stock only make? Where did the difference go?
- Click “Drop to $90”: how much less does the covered call lose than holding the stock only? Exactly which number is it?
- Drag the strike from $105 to $101, then to $115: how do the premium collected and the “Max profit (per share)” change? That's the trade-off between income and upside.
Quiz and explanations
- 1. You buy the stock at $100 and sell a call with a $105 strike for a $1.65 premium. At expiration the stock is $120. What's your P&L per share?
- Answer: +$6.65.Your shares are bought at $105: a $5 price gain + $1.65 premium = $6.65. Holding the stock alone would have made $20; the missing $13.35 went to the call buyer.
- 2. Same trade. What's the breakeven?
- Answer: $98.35.Purchase price $100 − premium $1.65 = $98.35.
- 3. Which view suits a covered call best?
- Answer: Expecting sideways or a small rise.In a sideways market or a small rise, you keep the shares and pocket the premium. A big rally gets capped, and a big fall lands almost entirely on the shares.
Terms in this lesson
- assignment (Assignment): When a buyer exercises, the exchange randomly picks a seller to deliver: a call seller must hand over shares, a put seller must buy them.
- breakeven (Breakeven): The underlying price at expiration where you neither make nor lose money.
- covered call (Covered Call): Selling 1 call against 100 shares you own to collect premium; you earn extra if the stock stays flat, but if it soars your shares are called away at the strike and your gain is capped.
- exercise (Exercise): When an option buyer uses their right, buying (call) or selling (put) the underlying at the strike price.
- premium (Premium): The price of an option, paid by the buyer to the seller; it's the most the buyer can lose.
- protective put (Protective Put): Buying a put while holding the stock, like buying insurance against a price drop.
- strike price (Strike): The price written into an option contract at which you can buy or sell.