Selling a covered call against stock you own — or a cash-secured put on stock you'd be happy to buy — lets you collect a premium in exchange for capping your upside or committing to a purchase price. A way to get paid for a view you already hold.
A covered call means selling a call option against stock you already own. In exchange for the premium collected upfront, you agree to sell your shares at the strike price if the option is exercised. It's "covered" because you already own the shares that would need to be delivered — unlike the uncovered (naked) call selling flagged as high-risk in the Greeks lesson.
A cash-secured put means selling a put option while setting aside enough cash to buy the shares at the strike price if assigned. You collect the premium upfront, and if the stock stays above the strike, the put expires worthless and you simply keep the premium. If it falls below the strike, you're obligated to buy the shares at the strike price — a price you'd already decided you were happy to pay.
Both strategies share the same basic trade-off: you collect premium income upfront in exchange for giving something up. A covered call caps your upside above the strike (your shares get called away at that price, no matter how high the stock goes). A cash-secured put commits you to buying more shares if the stock falls, even as it keeps falling further. Neither strategy eliminates the underlying stock risk — they reshape it, in exchange for income.
100 shares owned at a $100 cost basis. A call is sold at a $110 strike for a $3 premium. Outcomes at three hypothetical stock prices at expiration.
| Stock Price at Expiration | Call Outcome | Stock P&L | Premium Kept | Total P&L |
|---|---|---|---|---|
| $95 (Below Strike) | Expires worthless | -$500 | +$300 | -$200 |
| $108 (Below Strike) | Expires worthless | +$800 | +$300 | +$1,100 |
| $120 (Above Strike) | Shares called away at $110 | +$1,000 (capped) | +$300 | +$1,300 (capped) |
Even though the stock rallied to $120, the covered call seller's total gain is capped at $1,300 — the shares are called away at $110, missing the additional $1,000 of upside a plain stockholder would have captured. The premium ($300) provides extra income and a small cushion in the -$200 scenario, but the trade-off is a hard ceiling on gains above the strike.
Enter your cost basis, the strike sold, the premium collected, and a hypothetical stock price at expiration — see the outcome.
Model (per share, ×100 for a standard contract): if stock ≥ strike, shares are called away — stock P&L caps at (strike − cost basis). If stock < strike, the call expires worthless — stock P&L = (stock price − cost basis). Total P&L = stock P&L + premium kept. Illustrative only, ignores commissions and taxes.
Answer all five, then hit "Check My Answers" to see how you did. Get one wrong? No problem — the explanation will show you exactly why.
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You've now sold options for income against a single view. The final lesson in this track combines multiple option legs to define risk precisely on both sides of a position.