Covered-Call Payoff
A visual and algebraic account of the covered-call payoff, capped region and relative opportunity cost.
#Payoff at expiry
The long-stock line continues upward one-for-one. The covered-call line rises with the stock until the strike, then becomes flat. The lime point marks the strike: the boundary between retained upside and the capped region.
#Piecewise form
V_T = { S_T + P, S_T ≤ K ; K + P, S_T > K }- V_T
- covered-call value at expiry
- S_T
- stock price at expiry
- K
- strike
- P
- premium, before costs
Relative to holding, the covered call is ahead by the premium while the stock finishes at or below strike. Above strike, relative performance equals premium minus the stock's excess over strike. The gap therefore widens without bound as the stock rallies, even though the covered call's absolute terminal value remains capped.
#Edge cases
- At exactly the strike, intrinsic call value is zero in the simplified expiry formula, but operational exercise or settlement conventions still matter.
- A stock price near zero produces a large position loss; premium is only a limited buffer.
- Early exercise, dividends, fees and non-European terms can affect realized cash flows before expiry.
- Token multipliers or corporate actions can change how raw token units map to economic shares.