Stock Market · Option Strategies

Covered call

The covered call is one of the most widely used strategies by institutional and retail investors alike. You own the underlying stock or ETF, and you sell a call option against it to earn extra income.

Construction

You own 1,500 shares of Reliance at ₹2,800 (1 lot = 500 shares, say you own 3 lots).

• Sell 3 × 2,900 call options expiring next month @ ₹45 each
• Premium collected: ₹45 × 3 lots × 500 shares = ₹67,500

Scenarios

If Reliance stays below ₹2,900 at expiry:

The calls expire worthless. You keep your shares AND the ₹67,500 premium. Sell again next month.

If Reliance rises above ₹2,900:

Your shares get called away at ₹2,900. You cap your upside. Profit = ₹100 price gain + ₹45 premium = ₹145 per share.

> The covered call sacrifices upside beyond the strike in exchange for guaranteed income.

When it's ideal

• You're a long-term holder who wants to earn on idle holdings
• You're slightly bearish or neutral on the stock in the near term
• High IV environment. Fat premiums to collect

The trap

If the stock crashes 30%, the ₹45 premium is cold comfort. The covered call doesn't protect against large downside. It's an income strategy, not a hedge.

Covered callhold stock + sell OTM call = earn income, cap upside, zero additional downside protection

Takeaway. Covered call: own stock, sell OTM call. Earn monthly income on your holdings. You give up upside beyond the sold strike. Best in flat-to-slightly-bullish markets with elevated IV.