Step-by-Step Covered Call Profit Examples
The best way to understand covered call profit calculations is through real-world examples. Below, we walk through three different scenarios: a stock that stays flat (option expires worthless), a stock that rises above the strike (shares called away), and a stock that drops below the breakeven (net loss). Each example uses actual numbers and shows every step of the calculation so you can follow along and apply the same process to your own trades.
These examples use common stock prices and realistic option premiums to demonstrate how covered calls perform in different market conditions. By working through each scenario, you will gain confidence in evaluating covered call trades before placing your orders.
Example 1: Stock Stays Flat (Best Case for Premium Income)
- 1Stock closes at $50 at expiration (below $55 strike)
- 2Option expires worthless - you keep full premium
- 3Stock P&L = ($50 - $48) x 100 = +$200
- 4Option P&L = $2.00 x 100 = +$200
- 5Total profit = $200 + $200 = $400
- 6Return = $400 / ($48 x 100) = 8.33%
Example 2: Stock Rises Above Strike (Called Away)
- 1Stock closes at $60 (above $55 strike)
- 2Option is exercised - shares called away at $55
- 3Stock P&L = ($55 - $48) x 100 = +$700 (capped at strike)
- 4Premium income = $2.00 x 100 = +$200
- 5Total profit = $700 + $200 = $900 (maximum profit)
- 6Opportunity cost = ($60 - $55) x 100 = $500 missed
- 7Without covered call, profit would have been $1,200
Example 3: Stock Drops Below Breakeven (Loss Scenario)
- 1Stock closes at $42 (below $46 breakeven)
- 2Option expires worthless - you keep premium
- 3Stock loss = ($42 - $48) x 100 = -$600
- 4Premium income = $2.00 x 100 = +$200
- 5Net loss = -$600 + $200 = -$400
- 6Without covered call, loss would be -$600
- 7Premium reduced the loss by 33%
Comparing All Three Scenarios
| Scenario | Stock at Expiry | Total P&L | Return | Outcome |
|---|---|---|---|---|
| Flat | $50 | +$400 | 8.33% | Keep shares + premium |
| Rise (called away) | $60 | +$900 | 18.75% | Max profit, shares sold |
| Drop | $42 | -$400 | -8.33% | Loss cushioned by premium |
In two out of three scenarios (flat and rising), the covered call is profitable. Even in the declining scenario, the loss is smaller than owning the stock without a covered call. This asymmetric risk profile is why covered calls are popular among income investors.
How to Create Your Own Examples
Real-World Context for These Examples
The examples above use a $48-$50 stock, which is representative of many mid-cap and large-cap stocks accessible to individual investors. With 100 shares ($4,800-$5,000 investment), a $200 premium represents approximately 4% return on invested capital in 30 days -- a level that is achievable with moderate implied volatility and a slightly out-of-the-money strike.