Covered calls explained with every dollar: the NVDA example
A covered call lets you collect cash today from shares you already own. The trade-off is that you give up some of the upside. Here's one hypothetical example followed through every scenario. The prices are invented for teaching, not live quotes.
The setup
- You own 100 NVDA shares at $150, worth $15,000.
- You sell one call option with a $165 strike, expiring in 30 days, for $5 per share.
- One contract covers 100 shares, so you collect $500 today.
By selling the call, you take on an obligation: if NVDA is above $165 at expiration, you may have to sell your shares at $165.
Four outcomes at expiration
| NVDA at expiration | Shares | Premium | Total |
|---|---|---|---|
| $150 (flat) | $0 | +$500 | +$500 |
| $160 | +$1,000 | +$500 | +$1,500 |
| $180 (assigned at $165) | +$1,500 | +$500 | +$2,000 |
| $120 (drop) | −$3,000 | +$500 | −$2,500 |
At $180, simply holding would have made $3,000. The covered call made $2,000: you gave up $1,000 of upside in exchange for the $500 premium. That's the ceiling.
At $120, the premium only cushions part of the loss. "Covered" means your shares cover the obligation to deliver; it doesn't mean you're protected from a fall.
The key numbers
- Break-even: $150 − $5 = $145.
- Maximum gain: ($165 − $150) × 100 + $500 = $2,000.
- Maximum loss: $14,500 if the shares went to zero.
Why 3.3% a month isn't 40% a year
$500 on $15,000 is 3.3% for one 30-day trade. Multiplying by 12 gives 40%, but that's not a return you can count on. Premiums change with volatility, shares can fall, and shares can get called away in a rally. Your real result is the stock's return plus the option's, minus costs.
Before you try it
- Your broker needs to approve you for options, and each contract normally covers 100 shares.
- Early assignment is possible before expiration, especially around dividends.
- You can usually buy the call back to close the position, or "roll" it to a later date, at a cost.
- In Canada, options in a TFSA or RRSP are limited to certain strategies; covered calls are generally allowed. Check your broker's rules and the tax treatment.
Watch the full covered call explainer on YouTube.
Disclosure: I own shares of Nvidia (NVDA). All prices in this article are invented for illustration. Options involve risk and aren't suitable for every investor. Education only, not financial, tax or investment advice. Numbers are illustrative; check your own situation, or speak with a licensed professional.