Covered Call

What you must believe

Your stock goes sideways or gently up this month, and you would genuinely sell it at the strike. You are trading away the big-rally case for cash today.

Construction

Own 500 Reliance at ₹1,400 (₹7,00,000). Sell the monthly 1,450 CE at ₹20, collecting ₹10,000, about 1.4% of the holding for the month.

The numbers, before entry

• Max loss: the stock's fall, cushioned by only ₹20/share; −₹40,000 at 1,300
• Max profit: ₹35,000, at or above 1,450 (called away + premium)
• Breakeven: ₹1,380 for the month
• Margin: roughly ₹1 to ₹1.5 lakh on the short call, mostly covered by pledging the shares

Greeks profile

Net long delta (stock minus the call's ~0.25), short gamma near the strike, long theta: the rent is yours now. The position wants a boring month.

Realistic expectations

One to one and a half percent a month when calm, capped months in rallies, real losses in falls. Across years: smoother than plain holding, behind it in strong bull markets. The premium is income, never protection.

Management rules

• Sell strikes you would happily deliver at, around 0.20 to 0.30 delta
• Buy back early winners (premium down 60 to 70%) and resell next cycle
• Decide earnings months in advance: richer premium, gap risk included

With other strategies

• With the cash-secured put it forms the wheel: puts until assigned, calls until called away, premium at every stage (Lesson 21)
• With a protective put it becomes a collar: the call premium funds the put, boxing the month into a known band
• The poor man's covered call replicates it for a fiftieth of the capital using a deep ITM long call as the shares (Lesson 25)
• Synthetically, covered call = short put at the same strike (Lesson 25's parity). If that sentence surprises you, it is the most useful surprise on this page

Common mistakes

• Selling calls on shares you cannot bear to lose
• Treating ₹20 of rent as a hedge against a ₹100 fall
• Panic-buying the call back in a rally while ignoring the share gain beside it
• Letting an ITM call run into expiry: physical settlement, delivery margins and STT on the whole contract value (Lesson 6)
• Trading on pre-bonus arithmetic after a contract adjustment has changed the lot size (Lesson 20)