At-a-Glance

Key Takeaways with Craig

Returning to our series on options strategies, today we’ll take a look at a relatively straightforward strategy called a “covered call”.  A covered call involves writing, or selling, a call against a long position in the underlying instrument.  Many traders look at a covered call as an income-generating strategy because of the option premium collected.  However, it does cap the upside potential of the long position in the underlying AND, the trader is still exposed to downside risk in that underlying position.  

Let’s look at a real-life example of a covered call using CME’s E-mini Nasdaq-100 (NQ) futures and options at 9:15 AM on Jan 13th on CME Direct.  

    E-mini Nasdaq-100 future:  20,771.00

    21,250 EOM E-mini Nasdaq-100 Call:

    Days to Expiration: 18

    Delta:  32

    IV:  21.4%

    Bid/Ask Midpoint:  204.5 

Side Note: At 21.4%, implied volatility is about 4% higher than it was during the first week of January in the NQ options.  Using the options calculator available on CME’s website and substituting 17% for the current 21.4%, the theoretical value of this same Call option drops to about 134 points.  In dollar terms, the trader will collect $4,090 selling the Call at 21.4% iv, but would have only collected about $2,680 if the Call were sold at a vol of 17%.  This underscores how important it is to understand the impact of implied volatility in options pricing.  

In our example above, a covered call would simply involve buying 1 NQ futures contract and selling 1 Call option (this trade can be done with multiple contracts in a 1:1 ratio).  In most cases, as in our example, the trader would sell an out of the money Call against the underlying position.  This position is rather intuitive to understand.  If we hold all else equal:

    - As the price of the future declines, the value of the long future declines, as would the theoretical value of the Call option.  In fact, the short call, in a sense, protects the long futures position to a decline of 204.5 points.  At expiration, if the price of the future had declined by 204.5 points from the price at expiration, the position would have neither gained nor lost value (commissions and fees excluded), as the decline in the futures price would have been offset by the 204.5 points collected from the sale of the option, which would be worthless at expiration.  However, the trader would be exposed to potentially unlimited losses on the futures position if the price of the  future continued lower (beyond 204.5 points). 

    - As the price of the future increases, the value of the long future increases, but so would the value of the Call option (which, because the hypothetical trade is short the option, would lead to a negative impact to the P&L of the position).  If, at expiration, the price of the underlying  future had risen exactly to the strike price of the option (21,250), the trader would enjoy the profits realized from the gain in the futures position as well as the premium collected on the sale of the now worthless option.  However, at expiration, the trader would not realize further gains if the price of the future had risen beyond the strike price, as the potential gains would be offset by the obligation to sell the future (since the buyer of the Call has the right to buy the future at the strike price, the seller of a call has an obligation to sell the future at the strike price) at the strike price.   In fact, if the future settled above the strike price, the trader’s long position would likely be “called away” and they would have to re-establish a long position if they wanted to maintain that exposure.  

Concluding, as you can see in the options P&L graphs below (the top denominated in “points”; the lower converted to US Dollars), a covered call can serve to generate income and act as partial downside protection for traders who hold a long position in an underlying future, but limit the upside price move potential and DO NOT offer unlimited loss protection to the downside.  


Traders Resources

The information in the market commentaries have been obtained from sources believed to be reliable, but we do not guarantee its accuracy and expressly disclaim all liability. Neither the information nor any opinions expressed therein constitutes a solicitation of the purchase or sale of any futures or options contracts. The information on this site compiled by CME Group is for general purposes only. All information and data herein is provided as-is. Additionally, all examples on this site are hypothetical situations, used for explanation purposes only, and should not be considered investment advice or the results of actual market experience. CME Group assumes no responsibility for any errors or omissions. CME Group, its affiliates and any third party information and content providers expressly disclaim all liability with respect to the information and data contained herein including without limitation, any liability with respect to the accuracy or completeness of any data. You use the data herein solely at your own risk. All data and information provided herein is not intended for trading purposes or for trading advice. All matters pertaining to rules and specifications herein are made subject to and superseded by official CME, CBOT, NYMEX and COMEX rules. Current rules should be consulted in all cases concerning contract specifications.

Neither futures trading nor swaps trading are suitable for all investors, and each involves the risk of loss. Due to the leveraged nature of futures trading and swaps trading, it is possible to lose more than the amount deposited in a position. Therefore, traders should not deposit more funds than they can afford to lose without negatively affecting their lifestyles. A trader cannot expect to profit on each trade, and should only devote a small amount of their available funds to each trade. All references to options refer to options on futures.

Past performance is not necessarily indicative of future performance.

CME Group, the Globe Logo, Chicago Mercantile Exchange, Globex and CME are trademarks of Chicago Mercantile Exchange Inc. CBOT is the trademark of the Board of Trade of the City of Chicago, Inc. NYMEX is the trademark of the New York Mercantile Exchange, Inc. COMEX is a trademark of Commodity Exchange, Inc. All other marks are the property of their respective owners. Each of Chicago Mercantile Exchange Inc. (ARBN 103 432 391), The Board of Trade of the City of Chicago Inc (ARBN 110 594 459), the New York Mercantile Exchange Inc (ARBN 113 929 436) and Commodity Exchange, Inc. (ARBN 622 016 193) is a registered foreign company in Australia and holds an Australian market licence.

This site does not constitute a prospectus, product disclosure statement or legal advice, nor is it a recommendation to buy, sell or retain any specific investment or to utilise or refrain from utilising any particular service. Readers should consult their legal advisors for legal advice in connection with the matters covered on this site.

CME Group is the world’s leading derivatives marketplace. The company is comprised of four Designated Contract Markets (DCMs). 
Further information on each exchange's rules and product listings can be found by clicking on the links to CME, CBOT, NYMEX and COMEX.

© 2025 CME Group Inc. All rights reserved.