Covered Call Profit/Loss Calculator

How to calculate Covered call profit/loss calculator?

A covered call strategy involves selling call options against shares of stock you already own. This calculator helps determine the potential profit or loss from such a strategy.

The maximum profit is achieved if the stock price rises to or above the strike price, calculated as: Maximum Profit = (Strike Price - Stock Purchase Price) + Premium Received. The break-even price is the stock purchase price minus the premium received: Break-Even Price = Stock Purchase Price - Premium Received. The maximum loss occurs if the stock price drops to zero, calculated as: Maximum Loss = Stock Purchase Price - Premium Received.

Using the Covered call profit/loss calculator calculator: an example

Let's consider an example with the following values:

Step-by-step calculation:

1. Step 1: Define Inputs. Assume you bought 100 shares of XYZ stock at $50 per share. You then sell a call option with a strike price of $55, receiving a premium of $3 per share.
2. Step 2: Calculate Maximum Profit. If the stock price goes above $55, your maximum profit is ($55 - $50) + $3 = $8 per share, or $800 for 100 shares.
3. Step 3: Determine Break-Even Price. Your break-even price is $50 - $3 = $47 per share. Below this price, you start incurring a loss.
4. Step 4: Calculate Maximum Loss. If the stock price drops to $0, your maximum loss is $50 - $3 = $47 per share, or $4700 for 100 shares.

Frequently Asked Questions

What is a covered call?

A covered call is an options strategy where an investor holds a long position in an asset and sells (writes) call options on that same asset to generate income.

What is the main benefit of a covered call?

The primary benefit is generating income from the premium received, which can offset potential losses or enhance returns if the stock price remains stable or rises moderately.

What is the risk of a covered call?

The main risk is that the stock price could fall significantly, leading to losses on the stock that are only partially offset by the premium received. Additionally, you cap your upside potential if the stock price rises sharply above the strike price.

When does a covered call reach its maximum profit?

Maximum profit is achieved if the underlying stock's price is at or above the strike price at option expiration, leading to the stock being called away.