A covered call is an options strategy where you own shares of a stock and sell (write) a call option against those shares. You collect a premium immediately and agree to sell your shares at the strike price if the stock rises above it by expiration.

The maximum profit is capped at: (Strike Price − Purchase Price + Premium Collected) × Number of Shares. It is achieved when the stock closes at or above the strike price at expiration.

Breakeven = Purchase Price − Premium Per Share. Because you collected premium, your effective cost basis is lower than what you originally paid for the stock.

The maximum loss is the net cost of the position: (Purchase Price − Premium) × Shares. This worst case occurs if the stock drops to zero. The premium collected partially offsets the loss.

Choosing a higher strike gives you more upside potential but less premium. A lower (in-the-money) strike gives more premium and downside protection but limits your gains. Most income-focused traders use slightly out-of-the-money strikes 20–45 days to expiration.

A covered call is a mildly bullish to neutral strategy. You profit most when the stock stays flat or rises slowly to the strike price. If the stock falls sharply you still lose money despite the premium collected.

Many traders close covered calls early when they can capture 50–80% of the maximum profit, freeing up capital for the next trade. Closing early also removes the risk of a sudden rally pushing the stock above the strike. If the stock drops significantly and the option loses most of its value, buying it back cheaply locks in the premium and lets you sell a new call at a lower strike to keep collecting income.

Annualized return = (Premium / Capital at Risk) × (365 / DTE). For example, collecting $1.50 premium on a $50 stock with a 30-day expiration yields 3% per period, which annualizes to roughly 36%. Annualizing lets you compare trades with different durations on a consistent basis and benchmark against other investments.