Take a look at the covered call risk profile in figure 1. If you sell the call, you’ll receive cash (premium), which is immediately deposited into your account (less any transaction costs). The cash is yours to keep no matter what happens to the underlying shares.

Do you pay taxes on covered call premiums?

Tax treatment of covered calls According to Taxes and Investing, the money received from selling a covered call is not included in income at the time the call is sold. If a covered call is assigned, the strike price plus the premium received becomes the sale price of the stock in determining gain or loss.

What is the max profit on a covered call?

The maximum profit of a covered call is equivalent to the strike price of the short call option, less the purchase price of the underlying stock, plus the premium received. The maximum loss is equivalent to the purchase price of the underlying stock less the premium received.

What if someone sells my covered call?

When you sell a covered call, you get paid in exchange for giving up a portion of future upside. For example, let’s assume you buy XYZ stock for $50 per share, believing it will rise to $60 within one year. You’re also willing to sell at $55 within six months, giving up further upside while taking a short-term profit.

When should I take profits on covered calls?

If you’ve had a nice gain in a stock position it’s good discipline to take a bit off the table from time to time to rebalance your portfolio. Covered calls are a good way to exit a position, or part of a position, by milking it for a bit of extra profit.

Should you let covered calls expire?

If you select OOTM covered calls and the stock remains flat or declines in value, the options should eventually expire worthless and you’ll get to keep the premium you received when they were sold, without further obligation.

What are the downsides of selling covered calls?

Cons of Selling Covered Calls for Income – The option seller cannot sell the underlying stock without first buying back the call option. – Losses due to downward moves in the underlying stocks price are only limited by the amount of premium received.