What you’ll take away
- A covered call has three prices: the premium you receive, the upside you surrender, and the tax assignment triggers.
- Only the first shows up as cash, which is why the other two get ignored.
- Net-vs-hold puts all three in one number: are you better off than simply owning the shares?
The visible half of the trade
“Free income on shares you already own” is how covered calls get sold. Sometimes that is nearly true. Sometimes the call quietly costs far more than it pays.
The mechanics are simple enough. You own 100 shares. You sell a call against them and collect a credit today. If the stock stays below the strike, the option expires, you keep the premium, and you still own your shares. That is the part everyone sees, because it arrives as cash and shows up on a statement.
The invisible half
Two costs never appear on any statement:
- The upside you gave away. Above the strike, your shares’ gains belong to the call buyer. For a stock that has been trending hard, the expected value of that forgone upside can exceed the premium outright — you are selling a growth engine’s best weeks for a flat fee. The engine estimates this from the stock’s own recent trend and movement: how likely is it to finish above your strike, and how much appreciation would the cap surrender if it does?
- The tax bill if you’re called away. Assignment sells your shares at the strike whether you wanted to sell or not. If they are long-held shares with a low cost basis, that realizes a large capital gain — a real cash payment to the IRS you did not plan on. The engine multiplies the assignment probability by the tax that assignment would trigger, using your tax settings. It also warns when a call is close enough to the money that writing it can suspend your shares’ long-term holding-period clock.
A covered call trades a small certain gain for an unlimited uncertain one. Below your strike you are ahead by the premium. Above it, every dollar the stock keeps climbing is a dollar you no longer earn — and the size of that red wedge is what net-vs-hold puts a number on.
When the cap costs more than the premium
Here are two covered calls on the same stock at the same moment. The only difference is the strike you choose:
100 shares bought at $60, now trading at $100
| $115 strike | $103 strike | |
|---|---|---|
| Premium collected | $120 | $390 |
| Less estimated tax on the premium | −$38 | −$125 |
| Chance you’re assigned | 8% | 41% |
| Expected upside forgone above the strike | −$21 | −$205 |
| Expected tax on the $40/share gain if called away | −$48 | −$246 |
| Net vs. simply holding the shares | +$13 | −$186 |
The $103 strike pays more than three times the premium and is the trade almost every screen would rank first. It is also expected to leave you nearly $200 worse off than doing nothing, because a 41% chance of a forced sale on a low-basis position is expensive in two currencies at once. Figures illustrative; your basis and tax rates change the answer entirely.
The richest premium on the board is often just the market paying you to sell something you didn’t want to sell.
One honest number: net vs. hold
Every covered-call candidate carries a single verdict: net-vs-hold. After tax, after expected upside forgone, after expected assignment tax — is writing this call expected to leave you better or worse off than simply holding your shares? Positive means the income genuinely beats the cap. Negative means the cap is expected to cost more than the premium.
Negative net-vs-hold candidates sink to the bottom of the list but stay visible, with the number attached. The point is not to forbid the trade — you may have perfectly good reasons to want the shares called away — it is to make sure you never cap a winner without seeing the price tag first.
What this number can’t know
Expected upside forgone is estimated from the stock’s recent trend, and recent trends are poor forecasters of the next month. A name that has drifted for a year can double on one announcement. Read net-vs-hold as a fair-value comparison under normal conditions, not a prediction — and never write calls on a position whose upside you would genuinely grieve.
Next lesson
10. Using options to protect your portfolio in a downturnPuts are insurance: a premium, a deductible, an expiry date. What real protection costs — and why selling premium for income is not a hedge.Educational information only — not investment, tax, or legal advice. Nest Money is not a registered investment adviser or broker-dealer. Every figure and diagram in this lesson is illustrative. Options involve substantial risk of loss, including loss greater than the premium collected.