Covered CALL

Covered CALL is a moderately bullish income strategy. It is a strategy where you buy or hold a stock and sell (Out-of-the-Money) OTM calls to get consistent income. It is used by investors who already own the stock of a company and look for additional income over and above dividends.

First, you need to analyze and buy good stocks preferably blue chip stocks, large cap stocks and good mid cap stocks. These stocks provide capital appreciation as well as dividends. If you want to get more returns out of the stock, you can go for Covered CALLs as well.

Some investors write or sell CALL options at the time of buying the stock. This is called as "Buy-Write". This strategy is used to reduce the cost basis of the purchased stock.

Trade Set-Up


Buy or Own Stock

Buy Future or Stock-Finvezto


short call-Finvezto

Covered CALL

short put-Finvezto

Illustration Using Nifty Futures & Options

Covered Call-Finvezto
Snapshot from Strategy Builder

In the pay-off graph above, the price of the underlying asset (Nifty) is plotted in the X-Axis and the profit/loss is plotted in the Y-Axis.

The black line with dots indicates the profit or loss at different prices of the underlying asset.

The region shaded in green indicates profitable zone and the region shaded in grey indicates loss zone.

A positive number (75 = Buy 1 lot) in the Quantity column indicates a Buy position and a negative number (-75 = Sell 1 lot) indicates a Sell position.

Entry Checklist

Market Outlook
  • Moderately Bullish Outlook
  • Price should be trending upwards and be clearly above a support zone
  • Volatility
  • Sell CALLs when the volatility is high
  • Open Interest
  • Huge PUT build up at support zone
  • Good CALL build up at resistance zone
  • Strike Price
  • Sell the CALLs at a strike price above the resistance zone identified, preferably OUT-of-the-Money CALLs that expire worthless
  • Positional or Intraday?
  • Sell monthly CALLs and hold them overnight to collect premiums while you own the stock
  • Once the current month CALL loses premium, you can sell a closer CALL or sell the next month CALL.
  • Risk Profile

    Risk [Loss]
  • Maximum Risk is unlimited as the stock purchased might fall to zero. But, it rarely is the case with good stocks. That is why you should always buy blue chip stocks, large cap stocks or good quality mid cap stocks.
  • Reward [Profit]
  • Maximum profit is when the price ends at the strike price of the sold CALL option during expiry. The stock price would have appreciated and the options would have expired worthless.
  • Break Even Point
  • The stock price minus the premium received through selling the CALL option
  • Options Greeks Impact

    Time Decay Impact [Theta]
  • Time decay is helpful for this position
  • You want the sold CALLs to expire worthless
  • Volatility impact [Vega]
  • If the volatility drops when you are in the position, it is helpful as the sold CALLs will decay quickly
  • Volatility is harmful when the price is close to the strike of the CALL. It will erase the gains from your stock.
  • Price Impact [Delta]
  • When the delta of the CALL option sold rises above 0.5 and becomes At-the-money or In-the-Money it is harmful for the position
  • Trade Management & Exit

    Rolling & Adjustments
  • If 50% of the CALL premium has decayed, look to sell the next month CALL option
  • Do not hold till expiry. Exit when more than 75% of the premium has decayed and roll to the next month option.
  • Stop Loss
  • Stop Loss should be set in such a way that Risk is limited to 1-2% of your entire capital
  • Exit Conditions
  • Exit when the delta of the sold CALL option becomes greater than 0.5
  • Exit when price breaks above the resistance zone
  • Exit when your loss is 1-2% of your capital
  • Exit when you receive more than 50% of the net credit
  • A Word of Caution

    • If you own the stock, sell OTM CALL options on a monthly basis well above the resistance zone.
    • Avoid selling calls when stock price is breaking all time highs as price usually breaks through the roof.
    • A rule of thumb is to sell a CALL option which has a premium which is equivalent to 2-3% of the stock price.
    • Make use of this strategy during high volatility phases to capture premium decay because of volatility crush.