Complete Profit and Loss Formulas for Covered Calls
Understanding the full profit/loss (P&L) formula for covered calls means knowing how to calculate your result at any possible stock price at expiration. The P&L is a piecewise function: it behaves one way below the strike (linear, with a slope of 1) and another way above the strike (flat, capped at maximum profit). This mathematical structure creates the distinctive covered call payoff shape.
The P&L formula accounts for three components: your stock cost basis, the premium received, and the stock price at expiration. By plugging in different expiration prices, you can build a complete P&L table showing your result across every scenario from the stock going to zero to the stock doubling.
The Piecewise P&L Formula
- 1Breakeven = $88 - $2.5 = $85.5
- 2At $78: P&L = ($78 - $88 + $2.5) x 100 = $-750
- 3At $88: P&L = ($88 - $88 + $2.5) x 100 = $+250
- 4At $95: P&L = ($95 - $88 + $2.5) x 100 = $+950
- 5At $110: P&L = same as at strike = $+950
P&L Table Template
| Price Point | Type | P&L Formula | P&L Value |
|---|---|---|---|
| $0 | Max loss | ($0 - $88 + $2.5) x 100 | -$8,550 |
| $86 | Breakeven | ($86 - $88 + $2.5) x 100 | $0 |
| $88 | At purchase | ($88 - $88 + $2.5) x 100 | +$250 |
| $95 | At strike | ($95 - $88 + $2.5) x 100 | +$950 |
| $115 | Above strike | Same as strike (capped) | +$950 |
Below the strike, P&L changes $100 for every $1 change in stock price (for 1 contract). Above the strike, P&L is flat. This creates the characteristic 'hockey stick' shape of the covered call payoff diagram.
How to Build a P&L Table
Including Commissions in P&L Calculations
For the most accurate P&L, subtract commissions from the premium received and add any assignment fee if applicable. Commission formula: Net Premium = Premium - (Entry Commission + Exit Commission) / Shares. With $0.65 per contract commissions, a round-trip on 1 contract adds $1.30 to costs, or $0.013 per share -- negligible on most trades but worth tracking over hundreds of trades.