A covered call is a popular options trading strategy used to generate additional income from a stock portfolio. It involves holding a long position in a stock while simultaneously selling (writing) a call option on that same stock. This calculator helps you determine the risk-reward profile of this trade before you execute it.
How the Calculation Works
The math behind a covered call involves several moving parts. Here is how our calculator derives your potential outcomes:
Net Cost: This is the amount you pay for the stock minus the premium you receive from the option buyer. Since each contract represents 100 shares, the formula is: (Stock Price - Premium) × 100 × Contracts.
Break-Even Price: The price the stock must stay above for you to avoid a loss. It is simply Stock Price - Premium.
Maximum Profit: If the stock price is at or above the strike price at expiration, your profit is capped. It is calculated as: ((Strike Price - Stock Price) + Premium) × 100 × Contracts.
Static Return: The percentage return you earn if the stock price remains exactly the same until expiration.
Example Scenario
Metric
Value
Stock Price
$100.00
Call Strike Price
$105.00
Premium Received
$2.00
Break-Even
$98.00
Max Profit
$700.00
Key Benefits and Risks
Investors primarily use covered calls for income generation and downside protection. By receiving a premium, you effectively lower your entry price into the stock. However, the trade-off is that you limit your "upside." If the stock price skyrockets to $120, you are still obligated to sell it at the $105 strike price in the example above.
This strategy is most effective in flat or slightly bullish markets. It is less ideal in a "moonshot" scenario or a severe market crash, though the premium does provide a small buffer against losses.
function calculateCoveredCall() {
var stockPrice = parseFloat(document.getElementById('stockPrice').value);
var callPremium = parseFloat(document.getElementById('callPremium').value);
var strikePrice = parseFloat(document.getElementById('strikePrice').value);
var numContracts = parseInt(document.getElementById('numContracts').value);
if (isNaN(stockPrice) || isNaN(callPremium) || isNaN(strikePrice) || isNaN(numContracts)) {
alert("Please enter valid numerical values for all fields.");
return;
}
var shares = numContracts * 100;
var totalPremium = callPremium * shares;
var totalStockCost = stockPrice * shares;
var netCost = totalStockCost – totalPremium;
var breakEven = stockPrice – callPremium;
// Max profit occurs if stock is at or above strike
var capitalGain = 0;
if (strikePrice > stockPrice) {
capitalGain = (strikePrice – stockPrice) * shares;
} else {
// If strike is below current price, you realize a "loss" on the stock but gain the premium
capitalGain = (strikePrice – stockPrice) * shares;
}
var maxProfit = capitalGain + totalPremium;
var staticYield = (callPremium / stockPrice) * 100;
var totalReturnIfCalled = ((strikePrice – stockPrice + callPremium) / stockPrice) * 100;
var downsideProtection = (callPremium / stockPrice) * 100;
// Display Results
document.getElementById('resNetCost').innerText = "$" + netCost.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2});
document.getElementById('resBreakEven').innerText = "$" + breakEven.toFixed(2);
document.getElementById('resMaxProfit').innerText = "$" + maxProfit.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2});
document.getElementById('resStaticYield').innerText = staticYield.toFixed(2) + "%";
document.getElementById('resCalledYield').innerText = totalReturnIfCalled.toFixed(2) + "%";
document.getElementById('resDownside').innerText = downsideProtection.toFixed(2) + "%";
document.getElementById('ccResults').style.display = 'block';
}