Covered Call

A Covered Call is a strategy where you hold the underlying (e.g., NIFTY or BANKNIFTY Futures) and sell a call option at a higher strike price to earn premium income. This strategy works best when the underlying price is expected to rise slightly but stay below the strike price.

• Ideal for moderately bullish conditions, where a modest price increase is expected.
• Selling a call 1-2% OTM from the current price provides good premium income and lower risk.
• Generates additional income from the premium, with limited downside protection from the premium received.
• Maximum profit occurs if the underlying closes at or below the strike price, with profit being the premium plus any price appreciation up to the strike price.
• Risk arises if the price drops significantly, as losses in the underlying are only partially offset by the premium.

Example:

• NIFTY trading at 18,000.
• You hold 1 lot of NIFTY Futures (lot size = 50) at 18,000.
• Sell 18,300 Call (OTM) at ₹100 with a near-month expiry.
• Outcome:
  1. If NIFTY stays below 18,300 at expiry:
     • The call option expires worthless.
     • You retain the ₹5,000 premium (₹100 × 50).
  2. If NIFTY rises to 18,400 at expiry:
     • Your futures are capped at 18,300 due to the call, earning ₹15,000 on futures and the ₹5,000 premium.
     • Effective profit = ₹20,000.
  3. If NIFTY falls to 17,800 at expiry:
     • Loss on futures = ₹10,000.
     • Net loss = ₹10,000 − ₹5,000 = ₹5,000.