# covered call

For a covered call, if I purchased the stock at 50 and sold a call option at 55 plus premium of 4. So isn’t my breakeven gonna be 50 because that is the price at which I bought the stock.

Also why is the breakeven and max loss calculated the same way?

Could you please explain in simple terms the value at expiration

Your break even is actually 46. You got a premium of 4 dollars… If you sold the stock at 50, you made \$4 on the transaction stil… therefore, the breakeven is 46 which is where you would make \$0.

The Max loss is if the stock went to nothing… Your max loss would be \$46 because you would have lost \$50 on the stock but you still made \$4 on the call option.

At time 0, you made \$4 from selling the call. If the stock goes to \$60, you gain \$10 from the stock, and lose \$5 from the call, giving a net gain of \$5. You made \$4 from selling the call, the net gain is \$5 + \$4 = \$9. If the stock stays \$50, you gain \$0 from the stock. You made \$4 from selling the call, so net gain is \$4.

If the stock goes to \$46, you lose \$4 from the stock, the call expires. You made \$4 from selling the call, so your net gain is \$0. So, \$46 is the breakeven price. To calculate maximum loss, consider if the stock goes to \$0. You lose \$50 on the stock, but you had made \$4 from selling the call. So your maximum loss is \$46. Hope that’s helpful. This is how I remember break-even prices and max/min losses for any option plays.

Wait, sorry I hadn’t read Tactics comment/explanation. I will let you know if I understood after reading it.

Wow thanks Tactic that was immensely helpful. Could you please also explain time value at expiration?

At expiration:

• If the stock price is 55 or less, then the call option is worthless, so the value of the covered call is simply the stock price
• If the stock price is above 55, then the value of the call option is stock price − 55, and the value of the covered call is stock price − (stock price − 55) = 55

I didn’t get the second point you were trying to make.

• If the stock price is 56, the value of the call is 1 (= 56 − 55)
• If the stock price is 60, the value of the call is 5 (= 60 − 55)
• If the stock price is 987, the value of the call is 932 (= 987 − 55)

The value of the covered call is the value of the stock less the value of the call:

• If the stock price is 56, the value of the covered call is 55 (= 56 − 1)
• If the stock price is 60, the value of the covered call is 55 (= 60 − 5)
• If the stock price is 987, the value of the covered call is 55 (= 987 − 932)