Covered Call | Options Strategies

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Hey there!

Today we’ll discuss how one can use covered calls to generate passive income.

A covered call is an options strategy that involves selling an out-of-the-money call option on a stock one already owns. This will generate income in the form of premiums during the holding period and lower the original cost of the underlying stock by the premium earned.

Out-of-the-money options have a higher probability of profit for an option seller in a sideways or rangebound market. Hence, this strategy is ideal for when you have a mildly bullish or rangebound view of a stock.

Assume you have 250 shares of ABC Ltd. at a cost price of ₹2,200. If you maintain a view that the stock will be only mildly bullish and not cross a price of ₹2,600 in the current month, you can sell 1 lot (250 shares) of call options of ABC Ltd. with a strike price of ₹2,600, for a premium of ₹8.20 per share (₹2,050 per lot).

Let’s look at the payoff of this strategy under different scenarios:

Note that with covered calls, one risks missing out on sharp price appreciation above the call option’s strike price.

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None of the above stock ideas are intended as recommendations. Please consult a registered advisor before buying/selling.

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