LessonThis is a lesson restated in new words. Any figure in it is an example from the source, not this desk's record.
A covered call is shares you already hold, plus a call you have sold. The short call, before the premium, pays nothing or loses at expiry. The shares change that. If you are assigned, you deliver stock you own instead of buying it in the market. You still keep the stock's downside, and you give away the rally past the strike.
Why it matters
A call is a right, not a duty, to buy at the strike at expiry. A put is the right to sell. The short side mirrors the long side because the contract is zero-sum. In the sketches, a short call down $12 is a long call up $12. Sell the call without shares and an in-the-money expiry forces you to buy high and deliver at the strike. Own cheaper shares and you deliver those. The premium is why anyone sells.
The idea in plain words
Supply and demand set today's price. Black-Scholes, here, explains the quote. It is not a forecast. The price moves until expiry, when it meets the hockey stick. One path could have been sold near $13, later looked like $27, and after time passed near the strike was about $5. The premium shifts the short payoff up and the long payoff down.
The cash in a call comes from the shares. Expire in the money with a strike of 100 and a spot of 120, and the long call buys at 100 and can sell at 120. The short side owes that. Naked, you buy at 120. Covered, with a cost of 90, you deliver shares you already have and sell them at 100. You miss the move from 100 to 120. You do not pay the 20-point gap in the market.
The lecture sorts three regions, using a cost of 90 and a strike of 100. Between those levels you have a stock gain and the premium. Above the strike you are assigned: upside capped, stock gain from 90 to 100, premium kept. Below 90 you are stuck with the shares. Sell a new call near the fallen price, say 80, and assignment recreates the naked problem, because you deliver stock that cost 90.
The simulated cash flows use 100-share lots. Assigned: stock gain $10 a share, $1,000, premium $1,686, together $2,686, and $4,102 of upside not taken. A finish at $83.96: stock loss $604, same premium, net $1,082. A finish at $67.36: stock loss $22.64 a share, premium $1,686, net loss $578. At $67 you cannot sell near the market without locking in the gap to a $90 cost.
How to use it
Buy the shares in a 100-lot if you intend to cover one call. In the live walk-through, Nvidia was around 215 to 216, the fill used as a cost was 216.55, and the short call was about 25 days out, past a 15 May earnings date, near a 40 delta, strike 225, for a credit of $720. Assignment at 225 would be a $9 stock gain per share, $900, on top of that credit. Earlier the same day, 30-delta strikes had been the 210s and 215s, before the spot jumped. Delta is not a fixed chance.
If the shares fall through the cost and you still want them, the lecture's adjustment is to buy more, lower the average, and only then sell calls again. On a name you meant to hold, the bad region is a drawdown you sit through, not a forced liquidation. The lecture also points at combining the call with cash-secured puts, the wheel, as a later step.
What usually goes wrong
The credit is received up front. Buy the call back and the later price changes the result. Let the shares fall far enough and the stock loss overwhelms the credit, as in the $578 net loss. A call sold under the cost, the $80 strike against a $90 cost, behaves like a naked short if assigned. The assigned simulation also missed $4,102 of upside. You do not know which region you will land in.
Questions people ask
What are the three regions?
Above the strike you can be assigned and you give up further upside. Between the cost and the strike, the stock gain and the premium both help. Below the cost, you hold the shares at a loss, and new calls near the market can lock that loss in.
What did the assigned simulation pay?
Stock gain of $1,000, premium of $1,686, together $2,686, against $4,102 of upside the shares would have had. The cost in that classroom case was 90 and the strike was 100.
What was sold in the live Nvidia example?
One hundred shares around 216.55, and a call struck at 225, about 25 days out, for a $720 credit. Assignment would add about $900 of stock gain. A drop through 216.55 is still a stock loss.