What is Call Writing? Advantages of Call Writing in the Stock Market

Want to earn income even when your stock is flat?”
This simple question captures the essence of call writing, an options strategy used widely by traders and long-term investors alike to generate passive income from their stock holdings. If you've ever wondered how to make money in the market even when your stocks are not soaring, you're about to discover one of the most practical strategies in the derivatives toolkit: 

Call Writing. In this article, we’ll break down what call writing means, its types, benefits, associated risks, and how you can implement it practically, especially on platforms like Samco, to generate consistent income from your portfolio. Whether you're a beginner exploring options strategies or a seasoned investor looking to enhance your returns, this guide is tailored for you.

I. Introduction to Call Writing and Options

Options are derivative contracts that derive their value from underlying assets, usually stocks or indices. A call option gives the buyer the right, but not the obligation, to buy the underlying stock at a predetermined price (strike price) before a certain date (expiry).

So, what does writing a call option mean?

Call writing, also known as selling a call, is when an investor sells this right to someone else in exchange for a premium, a fixed fee. In doing so, the seller (or writer) assumes the obligation to sell the stock if the buyer chooses to exercise the option.

Let’s decode it with a simple analogy:

Imagine you're a landlord (call writer) who rents out your apartment (stock holding). You collect rent (premium) from a tenant (option buyer), who has the right to buy the apartment at a fixed price. If the apartment price goes above that fixed rate, you might have to sell it at a discount. But if it doesn’t, you keep the rent and the apartment.

That’s the core idea of call writing.

II. What is Call Writing?

Call writing is the act of selling a call option to a buyer. The call writer agrees to sell a specific stock at a fixed price (strike price) within a defined timeframe, if the buyer chooses to exercise the option. In return, the writer receives a premium upfront, regardless of whether the option is exercised or not.

Key Components:

• Strike Price: The price at which the call buyer can buy the stock.
• Premium: The amount received by the writer from the buyer.
• Expiry Date: The last date on which the option can be exercised.
• Obligation: The call writer is obliged to sell the stock if the buyer exercises the option.

Why do traders write calls?

• To earn premium income
• To hedge existing positions
• To profit in a range-bound market

Let’s now understand the two primary types of call writing.

III. Types of Call Writing

1. Covered Call Writing

A covered call is when the seller of the call option already owns the underlying stock. This is a conservative and widely used strategy for generating regular income.

When to Use:

• When you own a stock and believe it will remain flat or mildly bullish.
• When you want to earn extra income from your holdings.
• When you're comfortable selling the stock at a predefined level.

Real-Life Example (with Hypothetical Numbers):

You own 500 shares of Infosys, currently trading at ₹1,500.

You write a 1-month call option with a strike price of ₹1,600 and receive a premium of ₹25 per share.

• If Infosys stays below ₹1,600: You keep the ₹12,500 premium (₹25 x 500) and continue holding the stock.
• If Infosys crosses ₹1,600: You must sell it at ₹1,600, but you still keep the premium, effectively selling at ₹1,625.

Covered Call Payoff Diagram:

• Max Profit = Premium + Gains up to Strike Price
• Max Loss = Stock value fall minus premium (since you own the stock)

This strategy works well for long-term investors looking to boost returns on their portfolio.

2. Naked Call Writing

A naked call is when you sell a call option without owning the underlying stock. This is a high-risk strategy that can lead to unlimited losses if the stock rises sharply.

When to Use:

• If you are highly confident the stock will not rise above the strike price.
• For experienced traders with sufficient margin and risk management in place.

Hypothetical Example:

You write a naked call option on Reliance, strike ₹2,800, stock currently at ₹2,700. You receive a premium of ₹40.

• If Reliance stays below ₹2,800: You keep the ₹40 premium.
• If Reliance surges to ₹3,000: You’ll incur a loss of ₹160 per share (₹3,000 - ₹2,800 - ₹40), which can escalate quickly.

Naked Call Payoff:

• Max Profit = Premium received
• Max Loss = Unlimited as stock can rise indefinitely

Thus, naked call writing is suitable only for advanced traders with access to high margins and strong risk control tools.

IV. Advantages of Call Writing

Now that you understand the types, let’s explore why call writing is such a powerful strategy.

1. Earn Premium Income

The most direct benefit, every time you write a call, you receive a premium upfront. This can act as a monthly or weekly cash flow, similar to earning rent.

Example: If you write 5 call contracts (1 lot = 50 shares), and receive ₹20 per share, that’s ₹5,000 in premium income per expiry.

Over time, this consistent cash flow can boost portfolio returns even in flat or mildly bullish markets.

2. Reduce Cost of Holding

By writing calls regularly, you reduce the effective cost of your stock holdings. For long-term investors, this is a smart way to improve return-on-investment.

Suppose you bought Tata Motors at ₹800 and receive ₹20 premium three times over 3 months, that’s ₹60 saved, making your effective cost ₹740.

3. Profit in Sideways Markets

Unlike traditional investing, where you rely on upward stock movement, call writing profits when the stock does not rise beyond the strike price. It thrives in range-bound or mildly bullish markets, which are quite common.

4. Hedge Existing Positions

Covered calls act as a mild hedge. If the stock drops slightly, the premium received reduces the loss. This makes call writing an effective risk-reduction tool.

5. Enhance Long-Term Returns

By writing calls repeatedly over months or years, investors can outperform pure stock holding, especially in volatile markets.

V. Risks and Limitations of Call Writing

No strategy is without its downsides. Let’s look at the potential risks of call writing—especially for beginners.

1. Unlimited Loss Potential (Naked Call)

If the market rises aggressively, a naked call writer has unlimited loss exposure. Unlike stock buying, losses can go far beyond your capital unless you use strict stop-losses or hedges.

2. Capped Upside (Covered Call)

In covered calls, if the stock surges beyond the strike price, your profit is limited. You must sell the stock at strike price, missing out on further gains.

3. Early Assignment Risk

In American-style options, you may be assigned early, i.e., forced to deliver stock before expiry, especially near ex-dividend dates.

4. Market Timing Required

Call writing needs a reasonable view of market movement. If you misjudge the market (e.g., write a call and the stock breaks out), you risk early assignment or capital loss.

5. Volatility Risk

High volatility means higher premiums—but also more risk. Sudden spikes due to earnings or global cues can lead to sharp losses for call writers.

VI. When Should You Use Call Writing?

Call writing is not suitable for all market phases. Here's when it works best:

• Sideways or Mildly Bullish Markets: Stocks expected to move within a range are perfect candidates.
• If you’re willing to Sell Your Stock: Covered call writers should be okay parting with the stock if the strike is hit.
• For Passive Income: Long-term investors with large holdings can use covered calls to generate monthly income.

VII. How to Write a Call Option on the Samco Platform

Call writing on Samco is simple, fast, and secure. Here’s a step-by-step guide:

Step 1: Log In to the Samco Trading Platform

Visit www.samco.in and log in to your account.

Step 2: Open the Options Chain Tool

Navigate to the F&O segment and select the stock or index you wish to write a call on.

Step 3: Choose the Strike Price & Expiry

Use the margin calculator to assess your position size and select a strike price above the current market price for a covered call.

Step 4: Place a Sell Order

Select “Sell Call Option,” choose the desired premium, quantity (lot size), and expiry date.

Step 5: Monitor the Position

Use real-time tools and analytics to manage your position. Use stop-loss orders if doing naked calls.

🔗 Useful Links:

• Samco Options Chain Tool
• Margin Calculator
• What is Options Trading

VIII. Conclusion

Call writing is one of the simplest and most effective strategies in options trading, especially for those seeking passive income or enhanced returns in flat markets. Whether you're a long-term investor holding blue-chip stocks or a trader playing weekly expiries, call writing can add a new dimension to your strategy.

However, like all strategies, it requires discipline, timing, and risk awareness. Covered calls are ideal for conservative investors, while naked calls should be left to experienced traders with proper risk management.