Covered Call

Q: What is the maximum profit on a covered call?

The strike minus the purchase price of the shares, plus the premium, times the lot size, reached when the stock settles at or above the strike. In the example, (1,600 minus 1,520 plus 31) times 500 is ₹55,500. Beyond the strike the shares are delivered and the extra rise is forgone.

Q: Does a covered call protect against a fall?

Only by the premium received. If the stock falls 10% and the premium was 2%, the loss is about 8%. The strategy generates income and caps upside; it is not a hedge. A protective put is the instrument for downside protection.

Q: What happens if the stock is above the strike at expiry on NSE?

The call is exercised automatically and the shares are physically delivered at the strike on the settlement date after expiry. The writer receives the strike price times the lot size and no longer holds the shares. The premium received was kept from the start.

Q: Can I write a covered call on Nifty?

There is no deliverable Nifty, but a holder of an index fund or Nifty futures can write Nifty calls against that exposure; index options settle in cash, so an in-the-money call at expiry pays cash rather than delivering anything, while the fund or futures position is kept. Sizing uses the 65-unit lot.

You already own the shares. A covered call rents out the upside above a price you would have sold at anyway, and pays you now for it.

In short: a covered call is a short call written against an equal quantity of the underlying shares. The writer collects the premium; if the stock finishes above the strike at expiry the shares are delivered at the strike and the upside beyond it is forgone; if it finishes below, the premium is kept and the shares remain. The downside of the shares is reduced only by the premium received. On NSE, where stock options are physically settled, the delivery is literal.

The intuition

A shareholder who would be content to sell at ₹1,600 while the stock trades at ₹1,560 can simply place a limit order and wait, earning nothing meanwhile. Or they can sell someone the right to buy their shares at ₹1,600 before a fixed date, and be paid for it now. If the stock reaches ₹1,600 the sale happens, as planned, plus the premium. If it does not, the premium is kept and the offer can be made again next month. The strategy is a paid limit order, repeated.

What it does not do is protect the shares. If the stock falls 10%, the holder loses 10% less a premium of 2%. The call is not a hedge; it is income in exchange for a cap. The right mental frame is that of a landlord, not an insurer.

Formula

P&L at expiry = (min(settlement, strike) − purchase price + premium) × lot size

Maximum profit = (strike − purchase price + premium) × lot size, reached at or above the strike

Break-even = purchase price − premium; downside = the shares’ downside less the premium

The combined position has delta below one (the short call offsets part of the shares’ delta), negative gamma, positive theta and negative vega: it behaves like a partial sale that earns time decay.

Worked example (illustrative numbers)

Suppose a trader holds 500 shares of a stock bought at ₹1,520, now at ₹1,560, with a derivatives lot size of 500. With 30 days to the monthly expiry and implied volatility of 25%, the 1,600 call trades at about ₹31. Writing one lot brings in ₹15,500.

Stock at expiry	Shares P&L (from 1,520)	Call obligation	Net P&L incl. ₹15,500 premium
1,400	−₹60,000	0	−₹44,500
1,489	−₹15,500	0	0 (break-even on the month)
1,560	+₹20,000	0	+₹35,500
1,600	+₹40,000	0	+₹55,500 (maximum)
1,700	+₹90,000	−₹50,000 (shares delivered at 1,600)	+₹55,500

Against the current price, the premium is about 2% for a month of waiting, and the cap gives up anything above a 2.6% rise. At 1,700 the holder has made ₹55,500 instead of ₹90,000 and no longer owns the shares. On NSE that last point is literal: the in-the-money call is exercised at expiry and the 500 shares leave the demat account against ₹8,00,000 of cash on the settlement date.

The covered call lifts the whole payoff by the premium and flattens it above the strike. The downside remains almost entirely.

Why it matters to an options trader

It is where call open interest above the market comes from in stocks. Holders writing calls at round-number strikes build the call walls that read as resistance on the chain.
It monetises a view of “not much higher”. A range-bound stock with elevated implied volatility is the ideal case: high premium, low chance of the cap binding.
It is half a collar. Spending the premium on a protective put below the market converts the income strategy into a bounded one.
Margin is light but not zero on NSE. Pledged shares can be used as collateral against the short call’s SPAN plus exposure margin, with a haircut; the call is not margin-free simply because the shares exist.

Common mistakes

Writing calls on a stock you do not want to sell. On NSE the shares will be delivered if the strike is breached at expiry; the cap is a sale, not a hypothetical.
Writing before results or corporate events. A gap through the strike gives away the whole move for one month’s premium.
Treating the premium as downside protection. A 2% premium against a 15% fall is not protection.
Writing more lots than shares held. The excess is a naked call with unlimited risk and full margin.
Ignoring the expiry-week delivery margin. Even though the shares are held, brokers block delivery margins on in-the-money stock options from E-4; the shares must be in the same demat and unpledged, or pledged appropriately, to be delivered.

Indian-market specifics

Stock options on NSE are European and physically settled: a covered call in the money at expiry delivers the shares at the strike after the monthly expiry on the last Tuesday (previous trading day if a holiday). Index options are cash-settled, so a “covered call” on Nifty against an index fund settles in cash with no delivery.
Lot sizes for stock options are stock-specific and revised periodically by NSE; the shares held must match the lot size per call written.
Margin on the short call is SPAN plus exposure, collectable from pledged holdings after haircut under the clearing corporation’s collateral rules; the premium received is credited.
STT: 0.15% of premium on the sell side when the call is written (from 1 April 2026); if the call is exercised, the holder pays exercise-side STT, and the delivery itself attracts the cash-segment delivery STT of 0.1% on the writer’s sale.
Dividends: a dividend before expiry lowers the stock and the call’s value; NSE adjusts strikes only for extraordinary dividends above its threshold.

FAQ

What is the maximum profit on a covered call?

Strike minus cost plus premium, per share: ₹55,500 in the example.

Does a covered call protect against a fall?

Only by the premium; it is income, not a hedge.

What happens if the stock is above the strike at expiry on NSE?

The shares are delivered at the strike; the premium is kept.

Can I write a covered call on Nifty?

Yes, against index-fund or futures exposure; it settles in cash.

Check the strike before you write it

The covered call strategy page shows payoff tables and strike choice. In the app, the Option Chain page lists stock options with premiums and implied volatility by strike, and the Calendars page shows the monthly stock expiry and holiday shifts.

Covered call strategy page Covered calls for income guide

Related terms

Call Option, the instrument written
Protective Put, the other half of a collar
Physical Settlement, what happens above the strike on NSE
Short Put, the equivalent position by put-call parity