The payoff
The whole portfolio at the end of one year, for any market move. Dashed: no hedge. Green: with the hedge.
Hedged portfolioUnhedged
Modeled with Black-Scholes pricing at 18% implied volatility. Hypothetical and illustrative only. Simulator and chart results are modeled, not actual trades or client results, and are not a prediction or a recommendation.
- When does it start protecting?
- It offers no true protection. The premium received cushions only small declines.
- Where does it stop?
- Just past the premium. Beyond that, losses flow through in full.
- Is upside limited?
- Yes. Gains above the call’s strike are given up, though you keep the premium.
- Is the cost known or unknown?
- Nothing is paid up front; you receive a premium. The cost is the gains above the strike you give up.
- Fits best when
- Income matters most and you expect flat or modestly rising markets.
- Watch for
- Covered calls are often described as conservative, yet they keep nearly all of the downside risk.