You own 100 shares of Microsoft. They produce nothing but dividends. What if those shares produced a steady monthly income without selling them?
This is exactly what a Covered Call does: sell a Call option on shares you own and collect a cash Premium right away.
Example: covered Call on MSFT| 100 shares of MSFT | At $415 |
| Sell a 425 Call (30 days) | Collect $3.20 = $320 |
| Downside breakeven | 415 − 3.20 = $411.80 |
| Max profit | (425 − 415 + 3.20) × 100 = $1,320 |
* This is a hypothetical illustration and does not reflect actual results. Results vary with market conditions and execution timing.
The three possible outcomes
Best: MSFT below 425 at expiration
The Call expires worthless. You keep your shares and the $320. You repeat next month.
Assignment: MSFT above 425
You sell your shares at $425. Your effective price: 425 + 3.20 = $428.20. A gain, but you miss what is above 425.
Sharp decline
The Premium (3.20) softens the damage in part. The breakeven is $411.80, so it is not a full hedge.
| MSFT price at expiration | P&L total |
|---|---|
| $390 | $−2,180 |
| $411.80 | 0 (breakeven) |
| $415 | $+320 |
| $425+ | $+1,320 (maximum) |
* This is a hypothetical illustration and does not reflect actual results. Results vary with market conditions and execution timing.
Risks not to ignore- If the stock jumps sharply, you miss the big gains above the Strike Price.
- Avoid this strategy right before earnings announcements.
