If you hold stocks, covered calls let you earn extra income with limited risk. Here's a step-by-step guide with real Indian market examples.
What is a Covered Call?
A covered call is an options strategy where you hold a long position in an asset (like shares of Reliance) and write (sell) call options on that same asset to generate income (the premium).
How it Works
Suppose you own 250 shares of a company trading at ₹2,000. You sell a 1-month call option with a strike price of ₹2,100 for a premium of ₹30 per share. You immediately pocket ₹7,500.
- Scenario A (Stock stays below ₹2,100): The option expires worthless. You keep your shares and the ₹7,500 premium. You can repeat this next month.
- Scenario B (Stock surges to ₹2,200): You must sell your shares at ₹2,100. While you missed out on the gains above ₹2,100, you still made a solid profit on the shares + the ₹7,500 premium.
The Risks
The main risk is opportunity cost—missing out on massive upward spikes in the stock price. It does not protect you from a sharp drop in the stock's value.