Covered Call Strategy Explained: A Complete Guide for Indian Investors

Introduction 

Passive income has become one of the most sought-after investment themes among Indian investors. With bank deposits and debt instruments offering modest returns, equity investors are increasingly exploring strategies that allow them to generate consistent cash flow from their portfolios. One such strategy that blends the benefits of stock ownership with options trading is the Covered Call Strategy.

Globally, covered calls are widely used by professional fund managers, high-net-worth individuals, and income-focused investors. In India too, the strategy is gaining popularity as investors seek ways to earn regular premiums from stocks they already own while maintaining long-term exposure.

At its core, a covered call is a conservative, income-generating strategy. It allows investors to “rent out” their stocks to option buyers in exchange for a premium. This strategy is particularly suited for those who own fundamentally strong companies like Infosys, Reliance, HDFC Bank, or large indices such as Nifty 50, but do not expect sharp rallies in the near term.

In this article, we will explore what the covered call strategy is, how it works in the Indian market, real-life examples, risks and rewards, taxation aspects, and when you should consider using it. By the end, you will know exactly how to apply this strategy to generate additional returns on your holdings.

What is a Covered Call Strategy? 

The Covered Call Strategy combines two components:

1. Owning a stock (or index futures) – you hold the shares in your Demat account.
2. Selling (writing) a call option on the same stock or index.

By selling the call, you agree to sell your stock at a predetermined strike price if the buyer chooses to exercise. In return, you collect an option premium upfront.

This premium acts as additional income, irrespective of whether the stock rises or falls. Since you already own the stock, your position is “covered,” meaning the obligation to sell is backed by actual ownership. This makes it safer than a “naked call,” where you sell a call option without owning the stock.

Example:

Suppose you hold Infosys shares at ₹1,500. You sell a one-month Infosys 1,600 Call Option for ₹25. Each lot = 300 shares (per NSE F&O lot).

• You receive ₹25 × 300 = ₹7,500 premium.
• If Infosys stays below ₹1,600 till expiry → option expires worthless, you keep ₹7,500 and still own the shares.
• If Infosys rises to ₹1,650 → you sell at ₹1,600, missing gains above this level, but premium adds to your effective selling price.

Thus, the covered call converts stagnant or mildly bullish holdings into income-generating assets.

(Visual payoff graph: flat upside after strike, limited downside protection from premium received).

How Does the Strategy Work in India? 

Step 1: Select a Stock

Choose a liquid, large-cap stock or index with available F&O contracts (Infosys, Reliance, HDFC Bank, Nifty 50, Bank Nifty). Avoid illiquid mid-caps with low options trading volumes.

Step 2: Choose a Strike Price

• At-the-Money (ATM): Generates higher premium but caps upside quickly.
• Out-of-the-Money (OTM): Lower premium but allows more stock appreciation before assignment.
• In-the-Money (ITM): Used for maximum downside protection but caps upside significantly.

Step 3: Select Expiry

• Weekly expiries (indices) → good for active traders seeking regular income.
• Monthly expiries (stocks) → better for long-term investors.

Step 4: Place Order on Platform

On Samco, you:

1. Search “Infosys 1600 CE” under F&O options chain.
2. Click “Sell to Open.”
3. Input lot size (300 shares).
4. Confirm order.

Step 5: Manage Position

• If stock trades below strike → option expires worthless, you keep premium.
• If stock rises above strike → your stock gets called away at strike price, but you still keep premium.

This strategy is best used when you have a neutral-to-mildly bullish outlook, meaning you don’t expect a sharp rally but want to generate consistent income.

Risk and Reward Analysis 

• Maximum Profit = Premium + Gains till Strike Price
  Example: Buy Infosys @ ₹1,500, Sell 1,600 CE @ ₹25. Max profit = (100 × 300) + 7,500 = ₹37,500.
• Maximum Loss = Unlimited Downside on Stock – Premium
  If Infosys crashes to ₹1,200, you lose ₹300 per share minus ₹25 premium, i.e., ₹82,500.
• Breakeven = Stock Purchase Price – Premium Received
  In above case, breakeven = 1,500 – 25 = ₹1,475.

Advantages:

• Generates income in flat or mildly bullish markets.
• Slight buffer against small declines.

Disadvantages:

• Caps your upside gains.
• Exposes you to full downside if stock falls sharply.

Payoff chart visual: flat capped line after strike, limited buffer below entry.

Covered Call Strategy Example (Indian Context) 

Let’s apply the strategy to Infosys (CMP: ₹1,500):

• Lot size = 300 shares.
• Buy Infosys @ ₹1,500 (already in Demat).
• Sell Infosys 1,600 CE (monthly expiry) @ ₹25.
• Premium earned = ₹7,500.

Payoff Scenarios:

This shows how covered calls cap profits but deliver steady premium income.

6. When Should You Use Covered Calls? 

• Sideways markets: When stock is consolidating with no major upside expected.
• Mildly bullish outlook: You expect some upside but not a major rally.
• Dividend stocks: Earn premium + dividends simultaneously.
• Earnings season hedging: Generate income if stock is unlikely to surprise on upside.

Avoid covered calls when:

• Expecting a big breakout.
• Holding highly volatile stocks.
• You’re unwilling to sell stock at strike price.

Benefits of Covered Call Strategy 

1. Earn passive income: Premiums add steady cash inflows.
2. Enhance portfolio yield: Works like a “bonus” return on your holdings.
3. Downside cushion: Premium acts as a small safety net against minor corrections.
4. Low maintenance: Once deployed, covered calls require limited monitoring.

Think of it as “renting your stock” — you still own it, but earn rent (premium) while holding.

Risks and Limitations 

• Opportunity Loss: If stock rallies beyond strike, your profit is capped.
• Stock Risk: If stock collapses, premium hardly protects.
• Liquidity Risks: Some stock options in India have low trading volume.
• Assignment Risk: Your stock may be forcibly sold at strike if option is exercised.

Example: You sell Reliance 2,800 CE at ₹40, but stock jumps to ₹3,000 → You lose ₹200 upside per share, keeping only ₹40 premium.

Thus, covered calls suit conservative investors, not aggressive speculators.

Taxation of Covered Call Strategy in India 

Premium Income:

• Classified as business income (if trading regularly).
• Taxed at slab rates under “Income from Business/Profession.”

Stock Gains/Losses:

• If sold due to option exercise →
  • Held >1 year → Long-Term Capital Gains (LTCG) taxed at 10% above ₹1 lakh.
  • Held <1 year → Short-Term Capital Gains (STCG) taxed at 15%.

Important:

Covered calls involve two tax treatments simultaneously:

• Premium = business income.
• Stock delivery = capital gains.

This mix makes taxation slightly complex but manageable with proper record-keeping.

Comparison with Other Strategies 

Covered calls are best for income-oriented investors holding long-term stocks.

Tools, Platforms & Support in India 

• Samco: Provides advanced option screeners, smart hedging tools, and strategy simulators.
• Zerodha Sensibull: Good for beginners to visualize payoff charts.
• Opstra by Definedge: Professional tool for Greeks and payoff modelling.
• Angel One: Offers simplified options chains and execution.

Brokerage costs vary, but Samco is competitive and offers additional research support, making it an attractive choice for covered call traders.

Conclusion & Key Takeaways 

The Covered Call Strategy is a powerful tool for Indian investors looking to earn passive income from stocks they already own. By selling call options on existing holdings, you can generate regular premiums, enhance portfolio yield, and reduce minor downside risk.

However, the strategy comes with trade-offs: your upside is capped, and you remain exposed to sharp declines in stock value. Covered calls are best suited for investors with a neutral-to-mildly bullish outlook who are comfortable selling their stocks at a predetermined price.

Before deploying real money, practice on simulators like Samco’s Options Strategy Builder. Once comfortable, covered calls can become a valuable addition to your portfolio — turning dormant holdings into income-generating assets.

 CTA: Explore Covered Call Opportunities on the Samco Platform today and start earning from stocks you already own!