Covered Call
A Covered Call is one of the simplest and most popular options strategies. You own a stock (or ETF) and sell a call option on it, collecting the premium. If the stock stays below the strike, you keep both the stock and the premium. If it rises above the strike, you may have to deliver the shares — but at the agreed price plus the premium. Indian investors use covered calls to generate steady income from long-term holdings.
Key takeaways:
Setting up a covered call
- Own at least one lot (or multiples) of an underlying stock.
- Pick a strike above the current price — typically 2–5% OTM.
- Choose an expiry — weekly, monthly or quarterly.
- Sell the call, collecting premium.
- If the call expires OTM, the position dissolves and you keep the premium. If ITM, your shares may be called away (delivered).
Worked example
You own 250 shares of Reliance at ₹2,500 (one F&O lot). Reliance is trading at ₹2,580. You sell the 2,650-strike monthly call at ₹25. You receive ₹6,250 (25 × 250). If Reliance stays below ₹2,650, you keep the shares and the ₹6,250. If it rises above ₹2,650, your shares are sold at ₹2,650, plus you keep the ₹25 premium — total realised price ₹2,675.
Income potential vs upside cap
| Outcome at expiry | Result |
|---|---|
| Stock below strike | Keep shares + keep premium |
| Stock at strike | Maximum profit — keep premium and shares (or sold at strike) |
| Stock above strike | Shares delivered at strike; capped upside |
When to use covered calls
- You hold blue-chip or stable mid-cap stocks long term.
- You expect modest or sideways price action over the option’s life.
- You want regular income on top of dividends.
- You are willing to sell the stock at the strike for the right premium.
Risks and trade-offs
- Capped upside — large rallies in your stock leave money on the table.
- Downside in the stock is only partly offset by the premium.
- Physical settlement at expiry — be ready to deliver shares if ITM.
- Margin pledging may be required for the short call leg in some brokers.
Variations
Cash-secured put is the mirror: sell a put option backed by cash to potentially buy the stock at a lower price. Covered call with collar adds a protective put for downside protection, at the cost of additional premium outflow.
Frequently asked questions
Do I need F&O activation for covered calls?
Yes. You also need to hold the underlying in your demat account, marked as collateral if required.
What happens at expiry if the call is ITM?
Your shares are delivered (sold) at the strike. You receive funds equal to strike × lot, plus the premium already in your account.
Can I roll a covered call?
Yes. Close the existing short call and open a new one at a higher strike or later expiry to extend the strategy.
Are covered calls tax-efficient?
The option premium is treated as business income (F&O). Long-term capital gains on the stock are unaffected if you do not get assigned.
