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Long Call vs Covered Call: Easy Explanation

Options trading offers a range of strategies for investors, each catering to different financial goals and risk appetites. 

Among these strategies, long calls and covered calls stand out for their unique approach to market movements. 

This article dives into the nuances of long call vs covered call, providing a clear comparison to help you decide which might suit your investment style.

Understanding Options: The Basics

Options are contracts that give the buyer the right, but not the obligation, to buy or sell an underlying asset at a predetermined price on or before a specific date. The buyer pays a premium to the seller for this right. 

The strike price is the set price at which the asset can be bought or sold, and the expiration date is when the option expires. Call options allow the buyer to purchase the asset, whereas put options allow them to sell it.

long call vs covered call: Detailed Comparison

Long Call

Definition and Mechanics

A long call option is when an investor purchases a call option, betting the stock price will increase above the strike price before the expiration date. The buyer pays a premium to the seller. 

If the stock price rises as predicted, the investor can buy the shares at the lower strike price, potentially selling them at a higher market price.

Potential Profits and Risks

The allure of long calls lies in their profit potential, unlimited up to the rise in stock price minus the premium. 

However, the risk involves losing the entire premium if the stock fails to rise above the strike price before expiration.

Suitability and Investor Profile

Long calls attract investors expecting a stock’s price to increase significantly. They suit those with a high-risk tolerance and a bullish outlook on the market.

Covered Call

Definition and Mechanics

A covered call involves selling a call option on a stock the investor owns. This strategy generates income through the premium received for the call option. 

If the stock’s price stays below the strike price, the option expires worthless, letting the investor keep the premium and the shares.

Potential Profits and Risks

The covered call limits profit potential to the gain from selling the stock at the strike price plus the premium. However, the risks include capped gains if the stock price soars and the obligation to sell the stock if the option is exercised.

Suitability and Investor Profile

Covered calls appeal to conservative investors seeking income through premiums. They fit well with those holding stocks with little expected short-term growth.

Long Call vs Covered Call: Comparative Analysis 

Both strategies serve different market sentiments. A long call reflects a bullish stance, while a covered call suggests a neutral to slightly bullish outlook, ideally when market volatility is low. 

Long calls are favored for short-term, aggressive strategies, whereas covered calls suit long-term holdings, offering an income stream.

Key differences include the risk and profit profiles: long calls pose a risk of losing the premium with unlimited profit potential, and covered calls offer premium income with capped gains. 

Both methods require thoughtful stock selection and timing to align with the investor’s financial goals.


Key Considerations Before Trading

An investor must identify their risk tolerance and investment objectives. Understanding market conditions and the chosen stock’s potential is crucial. 

While both options strategies can offer advantages, they also come with their own risks and should be approached with knowledge and caution.

Pro Tips

Using technical analysis and market indicators helps in deciding entry and exit points for both strategies. Diversification remains a prudent advice, mitigating risks associated with options trading. 

Staying updated with market news ensures investors can react to changes affecting their stock positions.

Frequently Asked Qusetions

What are the tax implications for long calls vs. covered calls?

Tax treatments differ, with long calls considered short-term investments if held for less than a year, often taxed at higher rates. Covered calls received premiums are taxed as short-term capital gains.

How does volatility affect the strategies of long calls and covered calls?

High volatility increases the premium prices, affecting both strategies. While it may benefit long calls by raising potential profits, it can make covered calls riskier if the stock price exceeds the strike price.

Can you execute both a long call and a covered call on the same stock?

Yes, implementing both strategies on the same stock might mitigate risks or leverage different market movements, known as a collar strategy.

What is the break-even point for a long call option versus a covered call option?

For a long call, the break-even is the strike price plus the premium paid. For a covered call, it’s the purchase price of the stock minus the premium received.

How do you determine the right strike price and expiration date for long calls and covered calls?

Choosing depends on market analysis, the stock’s volatility, and your financial goals. Longer expirations give the stock more time to move, while strike prices reflect your risk tolerance and market outlook.


Deciding between a long call and a covered call depends on your market outlook, risk tolerance, and investment goals. While long calls suit those with a bullish perspective and higher risk tolerance, covered calls are preferred by investors seeking to generate income on their stock holdings with moderate growth expectations.

Both strategies, when used wisely, can enhance an investor’s portfolio, but they require a solid understanding of the market and one’s financial aspirations.