Covered Call
intermediateSell upside potential for guaranteed income. The most popular options strategy — and the same concept embedded in FCNs and other yield enhancement structured products.
Parameters
Payoff at Expiry
You own 100 shares at $185. You profit when the stock rises, lose when it falls. Unlimited upside, full downside.
You sell a call at $200 strike, collecting $5.5 premium. You keep the premium but must sell your shares at $200 if the stock rises above it.
The premium lowers your break-even to $179.50. Your upside is capped at $200, but you generate income in flat or mildly bullish markets.
How Covered Calls Work
What is it?
A covered call is the simplest options income strategy: you own 100 shares of a stock, and you sell (write) a call option against those shares. You collect the premium upfront as income. In exchange, you agree to sell your shares at the strike price if the stock rises above it.
The trade-off
- Immediate premium income
- Lower break-even price
- Works in flat / mildly bullish markets
- Can repeat monthly for consistent income
- Upside capped at the strike price
- Must sell shares if stock rallies past strike
- Still exposed to full downside (minus premium)
- Opportunity cost in strong bull markets
Connection to structured products
A Fixed Coupon Note (FCN) is essentially a covered call in structured product form. The "coupon" you receive is the option premium, and the "barrier" defines where you take delivery of shares. Understanding covered calls means you already understand the core mechanic of FCNs.
When to use
- You already own the stock and are neutral-to-mildly bullish
- You want to generate income from a flat position
- You're willing to sell if the stock reaches your target price
- You want to reduce cost basis over time