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Covered call

Owning 100 shares and selling a call against them, collecting premium in exchange for capping the upside above the strike.

Payoff of a covered call at expiryThe shares' straight diagonal line, lifted by the premium and then flattened above the strike.Profit / loss per share08595100120Strike 110Shares aloneBreakeven 97Max profit 13no gain above 110Loss grows as the stock fallsUnderlying price at expiry
Covered call: payoff at expiry. Shares bought at 100 with a 110 call sold for 3. The 3 cushions the downside to a 97 breakeven, but everything above 110 belongs to the call buyer, so profit stops at 13 while the loss below still follows the shares.

The premium lowers your cost basis and adds income; the trade-off is that if the stock rallies past the strike, your shares are called away at that price and you miss the rest. If the stock falls, you still own it and the premium only softens the loss.

It is the second half of the-wheel. Selling calls repeatedly against a long-term holding is a common income approach with a clear ceiling.

Example: you own 100 shares at $48. You sell the $50 call for $1.20. If the stock is above $50 at expiration you sell at $50 plus the $1.20, a $3.20 gain. If it stays below $50 you keep the $120 and the shares.

Related: cash-secured-put, the-wheel, call-option, assignment

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