Explain a covered call: why an investor writes one, how it is built, its payoff and value at expiry, its risks and profit, the most it can gain or lose, and the underlying price at which it breaks even
The idea
A covered call is a long asset plus a short call, used to earn income, sell at a target price or improve an exit. Value at expiry is S − max(0, S − X); profit adds the premium c and subtracts the purchase price S0. Maximum profit is X − S0 + c; maximum loss is S0 − c, if the asset becomes worthless; breakeven is S0 − c. With S0 = 50, X = 55 and c = 2, the best outcome is a gain of 7, the worst a loss of 48, and breakeven is 48. The trap is treating it as a hedge: the premium only cushions a fall, while upside beyond the strike is surrendered.
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