11.38Covered Call
1What is it?
Own the stock (or underlying) and sell a call on it.
2Why does it exist?
When it is used: You hold shares, expect flat to mildly rising prices, and want extra income.
3Diagram
Max profit
₹62,500
Max loss
₹7,37,500
Breakeven
₹1,475
4Calculation
- Hypothetical stock at ₹1,500, lot 500. You own 500 shares, sell 1,600 CE at ₹25 → receive ₹12,500.
- Expiry ₹1,700 → shares called away at ₹1,600 → profit capped at ₹62,500.
- Expiry ₹1,400 → stock loss ₹50,000, premium +₹12,500 → net −₹37,500.
- Maximum profit: (Call strike − stock cost + premium) × qty = (100 + 25) × 500 = ₹62,500
- Maximum loss: Large: stock can fall to zero, cushioned by premium: (1,500 − 25) × 500 = ₹7,37,500 in theory
- Breakeven: Stock cost − premium = ₹1,475
5Risks
- Limited-risk position: the most you can lose is known in advance.
- Premiums shown are hypothetical; real premiums depend on volatility and time to expiry.
6Quick revision
- Max profit: (Call strike − stock cost + premium) × qty = (100 + 25) × 500 = ₹62,500
- Max loss: Large: stock can fall to zero, cushioned by premium: (1,500 − 25) × 500 = ₹7,37,500 in theory
- Breakeven: Stock cost − premium = ₹1,475
7Knowledge check
Q1. What do you give up in a covered call?Show answer
Upside above the call strike.
Q2. Main risk?Show answer
The stock falling (only partly offset by premium).
Q3. Breakeven?Show answer
Stock cost minus premium.
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