How to use the covered call calculator
- Shares owned and purchase price. Enter the number of shares in multiples of 100, since each call contract covers 100 shares. Use your cost per share, or today’s price if you are buying the shares now as a buy-write. Using today’s price measures the return from this point on, which is usually the better basis for deciding whether to sell the call.
- The call. Enter the strike and the premium per share from the bid in your broker’s option chain, and the number of days until expiry.
- Dividend (optional). If the stock goes ex-dividend before expiry, enter the dividend per share. You collect it as long as the shares have not been called away before the ex-date.
- Commission per contract (optional).
The results show the profit if the shares are called away, the static return if the stock does not move, both also annualized, the break-even price and the downside protection. The chart compares the covered call with simply holding the shares.
How covered call returns are calculated
Maximum profit = (K − S0 + P + D) × Shares − Commissions
Break-even = S0 − P − D + Commissions ÷ SharesS0 is the purchase price per share, K the call strike, P the call premium per share and D any dividend per share received before expiry.
If-called return = Maximum profit ÷ Net investment
Annualized return = Return × 365 ÷ Days to expiry
Downside protection = (S0 − Break-even) ÷ S0Annualizing is simple (not compounded), the usual convention for short-dated option income. Compounding a 30-day return twelve times a year would give a higher figure, which assumes you could repeat the trade on the same terms every month.
A worked example
You own 300 shares of Company A, bought at $48.50. You sell 3 calls with a $52.50 strike expiring in 35 days, for $1.35 a share. The premium brings in $403.05 after commission, and your net investment drops to $14,146.95.
- If the stock is unchanged at expiry, the calls expire worthless and you keep the premium: a static return of +2.85%, or +29.71% annualized.
- If the stock finishes at or above $52.50, your shares are sold at the strike. You make the 8.25% rise to the strike plus the premium, $1,603.05 in total, an if-called return of +11.33% or +118.17% annualized.
- If the stock falls, the premium absorbs the first 2.77%. Below the break-even of $47.16 you lose money roughly as if you held the shares alone.
The annualized if-called figure is large because it assumes the 8.25% rise to the strike, plus the premium, could be repeated every 35 days. Use the annualized numbers to compare calls with different expiries, not as an expected yearly return.
Choosing the strike
The strike decides how much income you take now and how much upside you keep. Using example premiums for three strikes on the same stock:
| Call sold | Premium | Maximum profit | Static return | If-called return | Downside protection |
|---|---|---|---|---|---|
| $50 strike | $2.30 | $1,138.05 | +4.96% | +8.21% | 4.73% |
| $52.50 strike | $1.35 | $1,603.05 | +2.85% | +11.33% | 2.77% |
| $55 strike | $0.70 | $2,158.05 | +1.45% | +15.05% | 1.43% |
A strike close to the current price pays the most premium and protects the most, but it caps the gain early and makes assignment likely. A strike further out leaves room for the stock to rise and pays less. Neither is better in general: the choice depends on whether you would be content to sell the shares at the strike.
If you sell a call with a strike below your purchase price, the static and if-called returns become the same number, because an unchanged stock would still be called away. A $47.50 call sold for $2.45, for example, locks in at most $433.05 and gives a bigger cushion (5.04%), but almost no chance of keeping the shares.
The trade-off on the chart
The chart shows the covered call (blue) against the shares alone (grey). Below the strike, the covered call line sits above the shares by the premium. Above the strike it turns flat: the call buyer collects every further dollar, and the gap to the shares-alone line widens as the stock climbs. The two lines cross just above the strike, at the strike plus the premium.
That shape explains the strategy’s reputation. In a flat or gently rising market it adds steady income. In a strong rally it lags badly, and in a crash it protects only by the amount of the premium. Many investors sell calls only on shares they would be happy to sell at the strike, and roll the call (buy it back and sell a later one) when they want to keep the shares.
Dividends and early assignment
A dividend paid before expiry adds to both returns. With a 30-cent dividend, the static return rises to +3.49% and the break-even falls to $46.86. But US equity options can be exercised at any time, and an in-the-money call is often exercised the day before the ex-dividend date so its owner can collect the dividend. If that happens you keep the premium and sell at the strike, but you do not receive the dividend. The ex-dividend calculator shows the key dates.
What this calculator does not include
- Value before expiry. Buying the call back early costs its market price at the time, which depends on implied volatility and time left. The Black-Scholes calculator estimates it.
- Taxes. In the US, having shares called away is a sale and can create a capital gain, and some in-the-money calls can affect the holding period of the shares. Check before writing calls on shares with large gains.
- Margin. The returns assume the shares are fully paid.
- Bid-ask spread and commissions on the share trade, which reduce small premiums noticeably.
- Compounding. The annualized figures assume nothing about reinvesting; they are a way to compare calls of different lengths.
For a sold call or put on its own, use the options profit calculator.