chetan86

Covered Call

Let's say you buy a stock for 30 and sell a call with a strike of 40. Premium is $5.

At expiration if St>= X, (45) your stock gets called away.
Value @ expiration is
Vt = St - Max (0,St-X )
Therefore Value at expiration Vt = 45 - Max (0,45 -40)= 40 or X. (this is always the case if St >X)
P&L is as follows :
You gain $10 for increase in the value of the stock (40-30) + the income from selling the call i.e $5 for a total profit of $15

If St was <= X,(35) then Vt = St and your profit would be (35 - 30) + Premium from call (5) = $10

When you sell a call you are betting against the price going up. You are the option seller and therefore are obligated to deliver if option is excercised.

Breakeven for covered call is S (price of underlying) - Premium received. So in the above case our cost was 30 and the premium was 5 so breakeven is $25.

My apologies for the formatting. I hope this helps