Visualizing Covered Calls with an SVG Chart + Motion
For an introduction to covered calls, read the Wealthsimple article: What is a covered call?.
The dynamic graph on this page serves two purposes: it conveys how a covered call P/L can differ from simply holding a stock over the same time, and it shows how different strike prices affect the break-even point and potential opportunity loss if the stock rises.
An example: AAPL is currently trading at $100. Given the current price, and APPL's 'greeks', a trading platform is offering the following premiums for contracts with the corresponding strike prices. The contracts have a 7 day expiry.
Premium: $2.50/share ($250.00 Total)
Break-Even Price: $97.50
Max profit: $750.00
The orange line shows the covered-call potential P/L, while the blue line shows stock-only potential P/L. Both lines share the same purchase price.
Scenario 1
The contract expires with $AAPL at $98.
Even though the stock price has dropped, you've offset the loss by by the premium collected. This is called the break-even price.
Scenario 2
The contract expires with $AAPL at $105.
The shares are re-assigned at the strike price, locking in a P/L of $7.50 per share. Net outcome = a profit of $750.
Scenario 3
The contract expires with $AAPL at $107.50.
This is the price at which any further price increase is an opportunity loss equal to the divergence between the two lines.
Scenario 4
The contract expires with $AAPL at $114.
Stock-only P/L continues rising, while the Covered Call P/L stays capped at the strike price.