What is a covered call strategy in stock trading?

What is a covered call strategy in stock trading?

A covered call is an options trading strategy where you sell a call option on a stock that you already own.
It’s used to earn extra income from the stock while keeping the shares, especially when you think the stock price will stay flat or rise only slightly.

How It Works:

  1. You own a stock (for example, 100 shares of Reliance).
  2. You sell a call option for that stock, agreeing to sell it at a certain price (called the strike price) if the buyer wants to buy it.
  3. In return, you earn a premium (income) from selling the option.

Two Possible Outcomes:

A. If the stock stays below the strike price: You keep both the stock and the premium.
→ Profit from the premium = passive income
B. If the stock goes above the strike price: Your stock may be sold at the strike price. You still keep the premium, but you miss out on further upside.

Example (Indian Context):

  1. You own 100 shares of TCS, currently priced at ₹3,500.
  2. You sell a call option with a strike price of ₹3,700 and earn a premium of ₹50 per share.
  3. If TCS stays below ₹3,700 by expiry, you keep the shares and the ₹5,000 (₹50 × 100) premium.

Why Use a Covered Call?

  1. To generate income from stocks you already hold
  2. To reduce downside risk slightly with the premium earned
  3. Best in sideways or mildly bullish markets

Best For:

  1. Medium to long-term investors
  2. Traders looking for passive income
  3. Investors with large holdings in a stock



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