This guide explains how a covered call works on an NSE stock, the numbers on one lot, how to choose the strike, what happens at expiry under physical settlement, and how to manage and automate it.
At a glance
| Covered call | |
|---|---|
| Market view | Neutral to mildly bullish on a stock you hold |
| Legs | Hold the shares (one lot), sell one call |
| Cost | You receive a premium |
| Maximum profit | Strike minus purchase price, plus the premium |
| Maximum loss | Purchase price minus the premium, if the stock falls to zero |
| Breakeven | Purchase price minus the premium |
| Time decay | Helps |
| Volatility | A fall in IV helps |
How a covered call works
The premium adds a small cushion to the shares and earns income in a flat market. The cost is the cap: if the stock rallies past the strike, the call's loss offsets the gain on the shares above that level.
A covered call does not protect you from a fall. The shares can lose much more than the premium. If you want a floor as well, see the collar strategy.
The numbers on one lot
Take a hypothetical NSE stock at ₹1,400 with a lot size of 500 shares, 26 days to the monthly expiry and an IV of 24%. Black–Scholes model prices:
- Hold 500 shares bought at ₹1,400 (₹7,00,000)
- Sell the 1,460 call at ₹15.85
- Premium received: ₹7,925
| Stock at expiry | Shares alone | Covered call |
|---|---|---|
| ₹1,300 | −₹50,000 | −₹42,075 |
| ₹1,384.15 | −₹7,925 | breakeven |
| ₹1,400 | ₹0 | +₹7,925 |
| ₹1,460 | +₹30,000 | +₹37,925 |
| ₹1,520 | +₹60,000 | +₹37,925 |
The premium is 1.1% of the share value for 26 days. In the model, the chance that the stock ends above ₹1,460, so that the gain is capped, is about 27%.
Choosing the strike
| Call sold | Premium | Maximum profit | Breakeven | Chance the cap applies (model) |
|---|---|---|---|---|
| 1,420 | ₹14,800 | ₹24,800 | ₹1,370.40 | about 43% |
| 1,460 | ₹7,925 | ₹37,925 | ₹1,384.15 | about 27% |
| 1,500 | ₹3,825 | ₹53,825 | ₹1,392.35 | about 15% |
A strike close to the price pays more but caps the shares sooner. A strike further out keeps more of the upside and pays less. Many holders sell a call with a delta of about 0.20 to 0.30, here the 1,460 or 1,480 strike.
What happens at expiry
Stock options in India are physically settled. If the call you sold expires in the money, you deliver the shares and receive the strike price for them. In the example, an expiry above ₹1,460 means you sell 500 shares at ₹1,460, plus the premium you kept. If you want to keep the shares, buy the call back before expiry.
Exchanges and brokers have their own rules for in-the-money stock options in the expiry week, including higher margins and early square-off. Check your broker's policy before you carry the position into the last days.
How a covered call behaves before expiry
With the stock unchanged after 13 days, the call has fallen to about ₹6.80, a gain of about ₹4,525 on the call. If the stock rises to ₹1,460 in the same 13 days, the call is worth about ₹28.05: the call shows a loss of ₹6,100 against a ₹30,000 gain on the shares. The cap only fully applies at expiry.
Margin and holdings
The short call needs SPAN and exposure margin like any short option. Shares you hold can be pledged as collateral after a haircut, but clearing corporations require at least half of the F&O margin in cash or cash equivalents. Ask your broker how it treats the shares behind a covered call.
A covered call with futures
Some traders write a "covered call" against long futures instead of shares, such as long Nifty futures and a short out-of-the-money call. The payoff of futures plus a short call is the same as a short put at the call's strike, so it carries the full downside of the futures. It is not covered in the sense that shares are.
When a covered call works, and when it does not
Works best when:
- You plan to hold the shares anyway and expect a quiet month.
- IV is high, which raises the premium.
- You are happy to sell the shares at the strike.
Struggles when:
- The stock falls sharply: the premium is a small cushion.
- The stock jumps on news, such as results, and the cap costs you the move.
- Results or a corporate action fall inside the expiry. Check the dates first.
Managing a covered call
- Roll before expiry. If the stock nears the strike and you want to keep the shares, buy back the call and sell a higher strike in the next month.
- Close early. Buy back the call once most of the premium has decayed, then decide whether to sell another.
- Skip event months. Avoid selling calls through results if a large move is likely.
Automating a covered call
In QuantPower's strategy builder, you can set a monthly rule: on a set day, sell one lot of the call nearest a target delta against your holding, buy it back at 80% of the premium earned, and roll if the stock trades within a set distance of the strike. Use market alerts to warn you as the stock approaches the strike, and test the rules in paper trading.
Common covered call mistakes
- Selling calls on shares you would not sell. Physical settlement can deliver them.
- Treating the premium as protection. It covers a small fall, not a large one.
- Chasing high premiums. A high premium usually means the market expects a big move.
- Ignoring tax. The premium from the call is F&O income, while the shares follow capital gains rules. See F&O taxation.
Frequently asked questions
Is a covered call safe?
It is less risky than holding the shares alone by the amount of the premium, but the shares can still fall a long way.
What happens if the call expires in the money?
The stock option is physically settled, so you deliver the shares at the strike price. Buy the call back before expiry if you want to keep them.
Can I write covered calls on Nifty?
You can sell Nifty calls against Nifty futures or an index fund, but futures plus a short call behaves like a short put. Against an index fund, the call's margin is not offset by the fund units the way it is by pledged shares.
How much do I need for a covered call?
The value of one lot of shares, plus the margin for the short call not covered by pledged collateral.
Sources
- Black, F. and Scholes, M. (1973). The Pricing of Options and Corporate Liabilities. Journal of Political Economy, 81(3), 637–654
- NSE: Equity derivatives contract specifications
- SEBI circular on physical settlement of stock derivatives, April 2018 (all stock derivatives from October 2019)