Toll Booth Trading
Blog

Covered Calls 101: Basics, Risks, and Simple Example

A foundational overview of covered calls: how they pair existing shares with a short call, when the strategy can be a fit, the main risks, and a straightforward numeric example to anchor the mechanics.

What is a covered call?

A covered call pairs shares you already own with a short call option on the same symbol to collect option premium for income.

When it’s a fit

  • Own ≥100 shares per symbol
  • Income focus with willingness to cap some upside
  • Sideways to modestly up market outlook

Key risks

  • Upside is capped above the strike price
  • Assignment risk if price is at or above the strike at expiration
  • Early assignment risk near ex‑dividend dates
  • Borrow/liquidity constraints can affect pricing and execution

Simple numerical example

  • Own 100 XYZ at $50; sell 55C for $120
  • If XYZ ≤ 55 at expiration: keep shares and keep the $120 premium
  • If XYZ ≥ 55 at expiration: shares called away at $55; gain from 50→55 plus $120 premium
  • Breakeven ≈ $48.80 (($50 × 100) − $120)

Mini glossary

  • Premium — cash received for selling the option
  • Strike — the price where shares may be sold if assigned
  • Expiration — date when the option expires
  • Assignment — shares are called away at the strike