Covered call: getting paid to sell shares you were willing to sell anyway

This page builds on UK options basics and assignment and expiry. Previous in Level 1: the long put; next: the cash-secured put. BP is used as a model underlying throughout; this is not a view on BP.

A covered call on one BP contract

A covered call is two holdings: shares, and one call option written (sold) against them. The writer is paid a premium now and in return must sell the shares at the strike price if the holder of the call exercises. On this page's example the premium is £120.00 for 60 days. The most that can be lost is the value of the shares less that premium: £5,180.00 if BP went to zero. What is given up is every penny above the strike: at 600p the shares alone would make £700.00, the covered call £420.00. It is designed for a holder who would sell at the strike anyway, and pays that holder for waiting.

Two rules are structural, not preferences. Shares held must at least equal the contract size times the calls written: 1,000 BP shares cover one standard ICE contract, and 999 do not, so a broker treats any shortfall as an uncovered call. And the cover must sit in the same account as the call, which rules out shares held in an ISA, since no ISA can hold options.

Before costs. After the £1.40 commission to open and the £1.40 commission on assignment, the most it can make is £417.20, the figure at the top of the page; counting the £5.00 cost of crossing half the quoted spread as well, it is £412.20. The breakeven after opening costs is 518.64p, and the most it can lose is £5,181.40 after the opening commission (£5,186.40 with the half-spread). Open this worked example in the strategy builder.

Yield against what is given up: eight calls on one BP chain

On the worked example the arithmetic is short: £120.00 on £5,300 of shares is 2.26% for 60 days, or 13.8% a year on a simple 365-day basis, as if the same premium could be collected every 60 days. Every covered call is a choice of strike and expiry, and the same BP chain on 17 August prices the choices differently. The table splits each premium into the part that is income and the part that is not. Intrinsic value is the amount by which a call is already in the money: the 520 call's first 10p is simply the writer's own share value, paid over now and handed back if the shares are called at 520p. Only the time value is income for taking on the obligation, so the time value is what the yield column annualises.

Premiums are model values on the 0.25p tick. Model probability called is the risk-neutral, lognormal probability (IV 26%) that the call finishes in the money; delta is not that probability, and the two differ by several points here. "Most it can make" and "given up" are before costs, measured from BP's 530p value on 17 August.

Three things stand out. First, on the 0.25p tick the 520 and 540 calls carry the same time value on each expiry, 19.25p at 60 days (the unrounded model values differ only in the second decimal place), because time value falls away about evenly either side of the at-the-money strike and the two sit the same distance from 530p; the 520 call's bigger premium is its intrinsic value. Second, near the money the shorter expiry pays more per year: 26.9% on the September 540 against 22.1% on the October 540, because time value decays faster as expiry nears. At the 560 strike the two are level (13.5% and 13.8%): 30p is a long way for BP to travel in 32 days, so the September 560 has little time value to decay. Writing monthly has a price too: twice as many trades, each with £1.40 of commission, a spread to cross and, in UK tax, its own computation. Third, the cheapest cap is the one furthest away: the October 580 costs only £130.00 of upside if BP reaches 600p, but pays £70.00.

Each curve runs across strikes from 480p (far right, deep in the money) to 610p (far left, far out of the money). The peak sits at the 530 strike. Moving right from the peak, the probability of losing the shares keeps rising while the income falls, because the extra premium is intrinsic value. Model values, BP 530p, IV 26%: the curves use unrounded model premiums, so the October 560 point shows 13.7% a year against 13.8% at the 12.00p fill in the table.

The example sits in the lower part of BP's assumed 12-month IV range: 26% is IV rank 25 on the model's 20%–44% range (how IV rank is calculated). At 20% the same October 560 call would have paid £73.89; at 32%, £167.90. The model's probability of assignment moves with it, from 26.0% to 32.9%: a bigger premium is payment for a bigger expected move, not a free improvement.

Payoff: the covered call against the shares alone

Below 560p the covered call is always exactly £120.00 better than the shares alone: that is the premium. Above 560p it falls behind by £10.00 for every penny, and the gap is £680.00 at 640p. The last column shows the other half of the story. With 30 days still to run, the position is worth less than its expiry value at every price above the breakeven, because the call still holds time value that the writer would have to pay to close it: at 560p the position shows +£245.01 on 16 September against £420.00 at expiry.

Worked example: BP from 17 August to 16 October 2026

Greeks: long shares that shrink as BP rises

Delta carries the lesson. At entry the position behaves like 660 shares, not 1,000. After a one-standard-deviation rise it behaves like 278, and after the same fall like 921: the covered call keeps most of the downside and sheds the upside as BP rises, which is the negative gamma in the row below. Theta is the writer's daily income, £1.88 at entry and £2.25 a month later with BP unchanged; vega is negative, so a rise in implied volatility costs the writer £7.88 a point at entry. Above 560p the position stops being "long shares with a bonus" and becomes a short-dated bet that BP will not climb further, with its delta falling towards zero (how position Greeks add up).

BP's 12 November ex-date and the December 560 call

The October call was chosen partly because its life ends before BP's next ex-dividend date. BP's calendar puts the third-quarter results on Friday 30 October and the ex-dividend date on Thursday 12 November 2026. A writer who wanted a longer cycle could write the 18 December 560 call instead, and that option lives across both dates.

On 17 August the December 560 call (123 days) is worth 20.19p on the model, pricing BP's dividend as 6.39p going ex on 12 November: the Q2 rate of 8.66 US cents converted at the model exchange rate, an assumption until BP declares the Q3 dividend on 30 October. Without the dividend the same call would be worth 22.37p: the dividend lowers the call's value, because the share price is expected to drop by the dividend on the ex-date. The European value is 19.81p; the 0.38p difference is the value of the holder's right to exercise early.

That right matters to the writer on Wednesday 11 November. A holder who exercises that day receives the shares, and with them the dividend. A holder who keeps the call keeps its remaining value, which falls when BP goes ex. For an options intermediary, which has relief from stamp duty on these purchases, exercise pays whenever the call's intrinsic value exceeds the value of keeping it. A private holder who does not want the shares also pays 0.5% SDRT on the strike, 2.80p a share or £28.00 a contract (the early-exercise test, with its SDRT twist).

On the model, exercise for the dividend starts to pay an intermediary once BP is above about 610.73p on 11 November, and a private holder only above about 637.61p. Because the counterparty to an exercise is usually an intermediary, the writer's working assumption is the first figure: above it, early assignment becomes likely, the shares go at 560p a day early and the £63.90 dividend goes with them. Below it, the writer keeps the shares over the ex-date and receives the dividend, taxed as dividend income. Neither outcome changes the premium already received.

The 30-day trap after a call-away

Assignment sells the shares, and a writer who liked BP enough to hold it often wants it back. UK tax treats a quick re-purchase differently from the sale that preceded it. Shares of the same company bought in the 30 days after a disposal are matched with that disposal first, before the section 104 pool (TCGA 1992 s106A; HMRC CG51560).

Take the holder in Example 4 on the tax page: 1,000 BP bought in 2025 with a pool cost of £4,827.00, the October 560 call written on 17 August for £120.00, and the shares called away on Friday 16 October. The tax page works the gain: £890.20, taxed in 2026/27. Now suppose BP closes at 585p and on Monday 19 October the holder buys 1,000 shares back.

The re-purchase turns an £890.20 gain into a £165.05 loss. Nothing is forgiven: the shares now held carry the old £4,827.00 cost, so the next sale without a quick re-purchase realises £1,055.25 more gain than it otherwise would. What moves is the year. A holder who meant to use 2026/27's £3,000 exempt amount, or to crystallise the gain at 18% within the basic-rate band, finds that it has not happened; £213.65 of tax at 24% (£160.24 at 18%) is deferred rather than paid. The matching window runs to Sunday 15 November, so Monday 16 November 2026 is the first trading day on which a re-purchase leaves the October computation alone. The same rule reaches shares acquired when a written put is assigned, which is how the Wheel meets it (30-day matching with options).

Three management conventions, priced in pounds

With 21 days left and BP unchanged at 530p, the October 560 call still has £37.43 of value and loses £2.36 a day: 31% of the premium is still to be earned, and it is coming in faster than at any earlier point, which is why the 21-day convention is a trade-off rather than a free exit. A writer who wants another cycle instead of a close can roll: buy this call back and write a later one, often at a higher strike. The mechanics, the "credit only" habit and its trap, and the tax of a roll are worked once on the rolling page, including when closing beats rolling. For UK tax, the buy-back is a cost of the original grant and the new call is a new grant (UK tax of a roll).

UK tax: where the £120 premium ends up

Computed at the mid-price fills. A fill at the bid or offer changes the premium, and so the gain, pound for pound. A cross-year assignment moves the premium only in the sense that the 2026/27 return should not show the grant; a return already filed would need correcting.

How much of each pound survives tax depends on its source, which is why a covered call on shares in a general investment account is often compared with savings interest and dividends. The table takes £120.00 of each, with the allowances already used elsewhere.

Before those rates apply, 2026/27 gives £3,000 of gains tax-free (the annual exempt amount), £500 of dividends (the dividend allowance) and £1,000 of interest for a basic-rate taxpayer or £500 at the higher rate (the personal savings allowance; none at the additional rate). One BP dividend on this holding, 6.39p a share, would be £63.90. For a higher-rate taxpayer whose allowances are used, a pound of premium keeps more than a pound of dividend or interest; for a basic-rate taxpayer the dividend keeps the most. That is a tax comparison, not a return comparison: the premium comes with the cap on the shares.

Costs, contract size and the account it needs

BP's ICE option is a standard contract of 1,000 shares, quoted in pence with a 0.25p tick (£2.50 a contract). ICE UK stock options expire monthly, on the third Friday, with no weekly expiries, so a covered call on a UK share is at most a monthly cycle. BP has no mini contract. On the 22 UK names that also list a 100-share mini, such as HSBC, Shell and Tesco, one mini call is covered by 100 shares; the minis are listed on ICE, but a reader would need to check that their broker offers them and quotes a two-way price (contract sizes).

A covered call needs no margin account. At IBKR it is Options Level 1, and a cash account may write it with the shares held and restricted until the call is closed, assigned or lapses; US brokers are allowed to do the same under Regulation T, which lets a cash account sell an option "as part of a covered option transaction" (12 CFR 220.8(a)(3)). The account and permission ladder is set out on the Level 1 page.

What the buy-write index record shows, and what it does not

The longest public record of covered-call writing is the Cboe S&P 500 BuyWrite Index (BXM). It holds the S&P 500 and, on each month's third Friday, writes a one-month S&P 500 call at the listed strike closest to, and at or above, the index level, held to expiry. Cboe's factsheet (data to 31 August 2026, from 20 June 1986) reports:

Read at face value, the index gave up return in strong markets (2020 is the sharpest case) for a smoother ride and shallower falls. The limits matter as much as the numbers. The figures before the index launched in April 2002 are back-tested. They are pre-tax, in US dollars, with no dealing costs or spreads. The calls are at the money and one month long, not 5.7% out of the money like this page's example. And an index of 500 companies says nothing about one share's path. What the record does support is the shape this page shows in pounds: a covered call trades upside for premium, and the trade looks worst in the years the underlying rises fastest.

A US covered call: 100 shares and two exchange rates

US-listed options are 100 shares a contract and priced in dollars, and many UK readers reach them first. Take a hypothetical US share at $150 on Monday 17 August 2026, 100 shares bought for $15,000, and one 18 September $155 call written against them (32 days, IV 30%, US rate 3.625%). The model values the call at $3.44; on the $0.10 tick above $3 it is written at $3.40, $340.00 for the contract, less a $1.00 minimum commission. The share closes above $155 on 18 September and is called away. US options carry no commission on assignment at IBKR, and no UK SDRT arises on US shares.

For UK tax, grant and assignment are one share computation (s144(2)(a)), but each amount is converted to sterling on its own date (HMRC CG78310), here at the ECB reference-rate crosses of $1.3559 per £1 on 17 August and $1.3344 on 18 September (a reader would use their own source):

Converting the $839 dollar gain at the September rate instead would give £628.75, £174.22 too little: the pound fell against the dollar over the month, and that currency gain on the $15,000 of shares is part of the taxable gain. If the share paid a dividend while held, US tax of 15% would be withheld with a W-8BEN on file, or 30% without one (the US route from the UK). Many US-listed shares also have weekly expiries, which the ICE UK stock options do not.

Covered call or a neighbour: what changes in pounds

Parity is the useful link. At the same strike and expiry, shares plus a written call and cash plus a written put have the same payoff at expiry; the call writer collects more time value because the put writer's cash earns interest meanwhile. What separates them in practice is who receives the dividend, when SDRT arises (on a put assignment the writer is the buyer and pays it), and whether the shares are already owned. Alternating the two is the Wheel. Option-income funds, which do something similar inside a fund and can be held in an ISA, are compared on the covered-call fund page.

How these numbers are calculated