What is a Covered Call? A Simple Guide
A covered call is an income strategy where you hold the underlying stock or futures and sell a call option against it. The premium collected provides income, but the sold call caps the upside. It suits investors who are mildly bullish or neutral on a holding.
A covered call turns a stock you already own into an income generator. You sell a call against it, collect premium, and accept a cap on the upside.
Below, we break it down with plain examples and a clear payoff where it helps. You can trade it on Stockk.
Key Takeaways
- You hold the stock and sell a call against it.
- The premium collected is income.
- The sold call caps the upside.
- It suits neutral to mildly bullish views.
- It adds yield in flat markets.
How does a covered call generate income?
Owning the underlying and selling a call against it lets you collect premium as regular income. If the stock stays below the call strike, the option expires worthless and you keep the premium. The trade-off is that gains above the strike are forfeited, since the call obligates selling at that level.
Say you hold a stock at ₹100 and sell the ₹110 call for a ₹3 premium. You keep the ₹3 whatever happens. If the stock rises above ₹110, your gains are capped there, giving a maximum profit of ₹13, which is the ₹10 rise plus the ₹3 premium. On the downside the premium cushions you, so your breakeven falls to ₹97.
When investors use covered calls
Covered calls suit investors who are neutral to mildly bullish and want extra income from holdings they expect to move sideways. The premium cushions small declines and adds yield in flat markets. The main cost is the capped upside, which matters most when the stock rallies strongly.
Covered call at a glance
| Item | Covered call |
|---|---|
| Income | The premium collected |
| Upside | Capped at the call strike |
| Best when | Stock moves sideways |
| Downside | Premium cushions small falls |
For hands-on covered call and other strategies, Stockk is built for Indian traders and backed by Indira Securities. A demat account is free, and there is plenty more in the Knowledge Center.
Futures and Options are leveraged products and carry a high risk of loss that can be more than the money you put in. This article is only for learning and is not a recommendation to trade in derivatives.
Frequently Asked Questions
What is the income from a covered call?
It is the premium collected from selling the call, kept if the stock stays below the strike. It adds yield.
What is the trade-off in a covered call?
The upside is capped at the call strike, so gains above it are forfeited. Income comes at the cost of upside.
When does a covered call work best?
In flat or mildly bullish markets where the stock moves sideways, so the premium adds yield while strong rallies cap gains.
Does a covered call protect against a fall?
The premium cushions small declines but does not fully protect against large falls. It is income, not full insurance.
Is a covered call low-risk?
It is lower-risk than naked selling since the stock backs the call, but the stock can still fall.
Investments in securities market are subject to market risks. This article is for educational purposes only and does not constitute investment advice.
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