Definition
Covered Call
A covered call means holding the underlying shares and selling a call option against them to earn premium.
If you own 250 shares of Reliance (one lot) and sell a slightly out-of-the-money Reliance call, you pocket the premium. If the stock stays flat or falls, you keep the premium as extra income; if it rises above the strike, your shares get called away at the strike but you still keep the premium plus the gain up to that point.
Indian investors use covered calls on delivery holdings to generate monthly income, and pledging the shares can supply the margin for the short call. The trade-off is capped upside — in a strong rally you forgo gains beyond the strike — so it suits range-bound or mildly bullish views.
Related terms
- Protective PutA protective put is buying a put option on shares you own to insure against a fall in price.
- CollarA collar holds the stock, buys a protective put, and sells a covered call to fund the put — capping both downside and upside.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.