Calculate the capped premium, breakeven and rising loss of a short call—and see how the result differs when the call is covered.
Core short-call formulas
Maximum option profit equals the premium received. Expiration breakeven equals strike plus premium. Above breakeven, a naked short call loses dollar for dollar as the stock rises, multiplied by the contract size.
These formulas exclude commissions and apply at expiration. Before expiration, time value and implied volatility affect the closing price.
Numerical example
Suppose a trader sells one 105 call for $3 when the stock is $100. The credit is $300 and expiration breakeven is $108.
At $105 or lower, the option expires worthless and earns $300. At $110, the option is worth $500 and the net option loss is $200. At $120, the net option loss is $1,200.
How a covered call changes the picture
If the trader also owns 100 shares purchased at $100, stock gains offset the short-call loss up to the strike. Above $105, the combined position is capped at a $500 stock gain plus $300 premium.
Below $100, the shares lose value while the premium cushions only the first $3 per share. Combined breakeven is $97 before fees.
Before expiration
A short call can show a loss even below expiration breakeven when substantial time value remains. Rising implied volatility can also increase the cost to close.
Use expiration formulas as a destination, not as a complete description of the path.
A practical example
Assume 100 shares, one short call and a clearly defined strike and expiration. Record the stock price, premium received, maximum called-away value and downside breakeven before placing the order. Then model outcomes below the strike, at the strike and well above it.
Option contracts involve assignment and expiration rules. Confirm contract specifications and broker requirements for the exact product being traded.
Frequently asked questions
What is the maximum profit on a short call?
The premium received, before fees.
What is the naked-call breakeven?
Strike price plus premium received at expiration.
Does a covered call have unlimited loss?
No, but the stock can fall substantially; the premium provides only limited protection.
Continue the Selling Call Options cluster
Explore related guides: What Is Selling a Call Option and How Does It Work? Covered Call vs Naked Call: Risk and Reward Compared How to Sell a Covered Call: Step-by-Step Guide. For a structured sequence, use the free Level 2 – Selling Call Option Strategy course.
Options involve risk and are not suitable for every investor. This material is educational and is not investment, tax or legal advice. Contract terms and broker requirements can vary.