Covered Call

In India, stock options have fixed lot sizes, so the share quantity must match the option lot for the call to be fully covered.

The two legs can be entered together or the call can be sold against shares you have held for years. Brokers treat the short call as covered when the demat holding matches the lot, which reduces the margin burden compared with a naked call.

If the stock stays below the strike, the usual exit is none at all: let the call expire, then sell the next month's call and repeat. Many investors buy the call back early once it has lost most of its value to lock the income and re-sell on the next bounce.

If the stock rallies through the strike and you want to keep the shares, buy the call back (at a loss on that leg) or roll it up and out to a higher strike in a later month. If you are content delivering the shares, simply let the position settle.

Theta works for the covered call writer. The sold option sheds time value daily, and that decay is the income stream the strategy is built on.

Selling near dated calls repeatedly harvests decay at its steepest. A twelve month view of a holding is usually better monetised through twelve monthly calls than one annual call.

Higher implied volatility means fatter premiums for the calls you sell. Stocks with lively options markets can pay a meaningful annualised yield through covered calls, especially around periods of elevated IV.

The flip side: elevated IV usually signals real event risk, such as earnings. Selling a call into results monetises the rich premium but also caps your gain exactly when a big positive surprise is possible. Decide deliberately, not by default.

If the stock falls, the sold call fades to nearly zero quickly. Buy it back for a few rupees and, if you still like the holding, sell a fresh call at a lower strike to keep the income flowing.

If the stock surges toward the strike early in the cycle, roll up and out: buy back the current call and sell a higher strike, further dated one. This raises the cap at the cost of a smaller net credit.

Adding a protective put beneath the position converts the covered call into a collar, trading some of the premium income for a hard floor under the stock.

A covered call has the same payoff as a short put at the same strike. Owning the underlying and selling a call produces the identical capped upside, premium cushioned profile as simply selling a put.

Replacing the shares with a deep in the money long call turns it into a poor man's covered call, the same income idea using far less capital.