1. What is a Covered Call?

A covered call is an options strategy where an investor holds a long position in an asset and sells call options on that same asset to generate income. The "covered" means the investor owns enough of the underlying asset to cover the potential obligation of the call option.

2. How Does the Calculator Work?

The calculator uses the covered call formula:

Where:

• \( \text{Premium} \) — The amount received for selling the call option
• \( \text{Strike} \) — The strike price of the call option
• \( \text{Cost Basis} \) — The original purchase price of the underlying asset

Explanation: The maximum profit occurs when the underlying asset's price is at or above the strike price at expiration. The profit consists of the premium received plus any appreciation up to the strike price.

3. Importance of Max Profit Calculation

Details: Understanding the maximum potential profit helps investors evaluate whether a covered call strategy is appropriate for their investment goals and risk tolerance.

4. Using the Calculator

Tips: Enter the premium received per share, the strike price of the option, and your cost basis per share for the underlying asset. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What happens if the stock price goes above the strike?
A: Your shares may be called away (sold at the strike price), but you keep the premium and profit up to the strike.

Q2: What is the risk in covered calls?
A: The main risk is opportunity cost - missing out on potential gains if the stock rises significantly above the strike price.

Q3: When is a covered call strategy most effective?
A: When you expect the stock to remain relatively flat or rise modestly during the option's life.

Q4: How does assignment work?
A: If the option is in-the-money at expiration, your shares will likely be sold at the strike price.

Q5: Can I lose money with covered calls?
A: Yes, if the stock price falls below your cost basis minus the premium received, you'll have a net loss.