Covered Call Calculator
Use this calculator to evaluate the potential profit or loss from a covered call strategy. It is designed for investors looking to generate income from option selling.
Results
Data Source and Methodology
All calculations are based on standard financial formulas for options trading. For more information, please refer to Options Profit Calculator.
The Formula Explained
Max Profit: \( \text{Max Profit} = (\text{Strike Price} - \text{Stock Price}) \times \text{Shares} + \text{Option Premium} \times \text{Shares} \)
Max Loss: \( \text{Max Loss} = (\text{Stock Price} - \text{Option Premium}) \times \text{Shares} \)
Breakeven Point: \( \text{Breakeven} = \text{Stock Price} - \text{Option Premium} \)
Glossary of Terms
- Stock Price: The current market price of the underlying stock.
- Option Premium: The price received for selling the call option.
- Strike Price: The price at which the option can be exercised.
- Shares: The number of shares involved in the covered call.
- Max Profit: The highest possible profit from the strategy.
- Max Loss: The maximum potential loss from the strategy.
- Breakeven Point: The stock price at which there is no profit or loss.
How It Works: A Step-by-Step Example
Suppose you own 100 shares of a stock currently priced at $100, and you sell a call option with a strike price of $105 for $3 per share. The potential outcomes are:
- The stock price stays below $105: You keep the option premium, and the shares are not called away.
- The stock price rises above $105: The shares are called away at $105, and you profit from the increase up to $105 plus the option premium received.
Frequently Asked Questions (FAQ)
What is a covered call?
A covered call is an options strategy where an investor holds a long position in a stock and sells call options on the same stock to generate income.
How do I calculate the breakeven point?
The breakeven point is calculated by subtracting the option premium received from the stock price.
Can I lose money with a covered call?
Yes, if the stock price falls significantly, the loss on the stock can exceed the premium received from the option.
What happens if the stock price exceeds the strike price?
If the stock price exceeds the strike price, the shares may be called away, and the profit is limited to the strike price plus the option premium.
Is a covered call a bullish or bearish strategy?
A covered call is generally considered a neutral to bullish strategy as it profits from a moderately rising or stable stock price.