Covered Call — income from the upside

What is a Covered Call?

A Covered Call is when you sell a Call option on an asset you already own. You receive money (the premium), but you agree to sell the asset if the price rises very high.

A simple analogy

Imagine you own a car worth $10,000. You agree with a neighbor: "If someone offers $20,000 within 4 months — I'll sell it to you." The neighbor pays you $200 for this right. If nobody offers $20,000 — you keep the $200 and the car. If someone does offer it — you sell for $20,000, but you don't get anything above that. And if the car loses value — that $200 doesn't cancel out the drop: a Covered Call generates income, not protection.

"Covered" means you already own that asset. You're not speculating — you're simply earning extra from what you already hold.

Once you understand this, it becomes possible to choose for yourself the price at which you'd agree to sell, and earn premium up to that point from an asset you'd otherwise just be holding.

The chart shows the result for one SOL: up to $160 the profit grows the same as holding SOL, plus you get the $2 premium (which is why the breakeven drops to $86 instead of $88). Above $160 the profit "locks in" (you have to sell for $160) — but that's already about an 82% rise from $88.

Why is the strike 2x the current price?

In our strategy we use a very high strike — almost double the current price ($160 at $88 = 1.8x):

Element	Value
Current SOL price	$88
Call Strike	$160 (~82% above)
Premium	~$2.00 per SOL (50 SOL → $100)
Position size	50 SOL out of 126 (~40% of the SOL position)

Why double the price instead of a closer strike?

Strike	Premium	Probability of having to sell	Does it make sense?
$100 (+14%)	$8.00	~35%	Too high a probability of losing the SOL
$120 (+36%)	$4.50	~20%	Still a fair chance
$160 (+82%)	$2.00	~8%	Low probability — this works for us
$200 (+127%)	$0.80	~3%	Too little premium

The $160 strike is a good balance. You earn enough, but it's very unlikely SOL doubles within 120 days.

The premium lowers the cost of insurance

The Covered Call premium directly reduces the Put Spread's cost:

Item	Cost
Put Spread (insurance)	-$500
Covered Call premium (50 SOL x $2.00)	+$100
Net insurance cost	-$400

Insurance gets 20% cheaper ($100 out of $500). Over a year that's about $1,200 — three 120-day cycles at $400 each.

What happens if SOL reaches $160?

If the SOL price rises to $160 and the Call is exercised:

Element	Value
Sold	50 SOL
Sale price	$160 per SOL
Amount received	50 × $160 = $8,000
Starting price	$88 per SOL (50 × $88 = $4,400)
Gain from SOL's rise	$8,000 − $4,400 = +$3,600
Plus premium	+$100
Total result	+$3,700 (calculated on just those 50 SOL)

That's a good result!

If SOL rises 82% to $160 and your Call is exercised — you sell 50 SOL with a $3,700 gain. The only "loss" is you don't get the gain ABOVE $160. But if SOL rose from $88 to $160, the portfolio has almost doubled already. Hard to complain.

An important technical detail: SOL isn't physically handed over

Deribit options are European-style and cash-settled — at exercise, nobody takes your SOL out of your wallet. Instead you pay the difference between the final price and the strike. Economically the result is the same as selling 50 SOL for $160, which is why we calculate it that way — but the SOL physically stays with you, and "selling" is shorthand.

Why only part of the position?

The Call is sold on only 50 SOL out of 126 (~40% of the SOL position):

Reason	Explanation
Upside potential	We don't want to cap the whole portfolio's growth
Collateral requirements	Deribit requires margin
Balance	~40% = enough premium, while the remaining 76 SOL grows with no cap
Liquidity	A smaller amount is easier to close

Covered Call vs Naked Call

It's important to understand the difference:

	Covered Call (you hold SOL)	Naked Call (no SOL held — risky!)
Do you hold SOL?	Yes (126 SOL)	No
Maximum loss	Foregone profit above the strike	Unlimited
Risk level	Low-medium	Very high

ℹ️

Our Call is "covered" — we hold 126 SOL, and the Call is sold on only 50. Even if SOL reaches $160, 76 SOL still remains.

Our strategy's rules

Rule	Detail
Strike	~2x current price (in our case $160 at $88 = 1.8x)
Quantity	At most ~40% of the SOL position (in our case 50 out of 126 SOL)
Duration	120 days (same cycle as the Put)
Rolled?	NO — let it expire
If exercised?	Accept it — it's a good result

The Call premium as income

Metric	Value
Short Call theta	+$0.75 per day
Per month	+$22.50
Per 120 days	+$90
Premium received upfront	+$100

Note: that ~$90 in theta and the $100 premium are not two separate amounts. You get the premium right away, and theta shows how that same premium is "earned" day by day as the option loses value toward zero. In total, this leg can give you no more than $100.

When a Covered Call doesn't work

Scenario	Problem	What to do
SOL rises +100%	You lose the profit above the strike	Accept it — still an 82% rise up to $160
SOL drops	The premium ($2 per SOL) covers only a small part of the drop	A Covered Call is not protection — the Put Spread covers a drop
Flash crash and recovery	The Call premium doesn't matter much	It balances out over time
Long sideways movement	Smaller premium	Sell a new Call after this one ends

Next step: Let's look at how to manage the whole options cycle — when to roll the Put, what to do when the Call expires.

Quick check

Why is a Covered Call called covered?

Practice task

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Paper Covered Call plan

The core of a Covered Call — premium for a promise to sell high. Calculate it for your hypothetical position (~15 min). Everything on paper only, no trading.

We're learning to calculate, NOT to trade — DON'T SELL ANYTHING. A real Short Call without holding the underlying (naked) carries unlimited risk, so we start on paper.

This is learning, not investing — use only small amounts you treat as tuition.

You just planned out a Covered Call on your hypothetical position — the premium and the worst case. Most people never do this.

Put Spread Managing the Options Cycle