Covered Call
Hold the underlying and sell a call against it to earn premium income, capping upside in exchange for a small buffer.
What is a Covered Call?
A Covered Call combines a long position in the underlying (stock or futures) with a short OTM call. The premium collected generates income and lowers your effective cost basis. In return you agree to cap your gains at the call strike — if the underlying rallies past it, your stock is 'called away' (or the short call offsets further gains). It is one of the most popular income strategies for investors who are mildly bullish or expect the market to drift sideways.
Payoff Diagram
Profit & Loss at expiry
Per share (multiply by lot size 75). Gold dots mark breakeven points; green = profit, red = loss.
Construction
- Own (or buy) the underlying — 1 lot / 100 shares equivalent.
- Sell 1 OTM Call against that holding.
- Collect the premium; repeat each expiry cycle ('rolling').
When to Use It
Use on holdings you are happy to hold or exit at the strike, when you expect flat-to-modestly-higher prices. Selling calls in high-IV periods maximises premium income. Not ideal before a big expected rally, which you would cap.
The Greeks
Positive Delta (net long), Negative Gamma, Negative Vega, Positive Theta (time decay works in your favour on the short call).
Risks & Considerations
- Upside is capped — you miss gains beyond the strike.
- The premium only partly offsets a large fall in the underlying.
- Assignment/physical settlement obligations on stock options at expiry.
Worked Example (Nifty)
Illustrative trade — lot size 75
You hold Nifty futures at 20,000 and sell the 20,400 CE for ₹120. You collect ₹120 × 75 = ₹9,000. If Nifty expires at 20,400, you gain 400 points on futures + ₹120 premium = (400 + 120) × 75 = ₹39,000. Above 20,400 your extra futures gains are offset by the short call. Below 20,000 the ₹9,000 premium cushions your loss.