Covered call strategy — how it works
A covered call earns premium income on a holding you already own. Learn the payoff and how to practise it on Nifty Paper Trade.
A covered call means holding the underlying (a stock or future) and selling a call against it to earn premium income. It's a popular strategy for mildly bullish or sideways markets — you collect the premium, capped by giving up big upside.
The structure
- Own the underlying (long stock/future)
- Sell an out-of-the-money call against it
Payoff
- You keep the premium whatever happens.
- If the price stays below the sold strike, you keep the underlying and the premium.
- If it rises above the strike, your upside is capped (the call offsets further gains).
- Downside: you still carry the underlying's fall (minus the premium cushion).
When to use it
When you're neutral-to-mildly-bullish on something you hold and want to earn steady income while you wait.
How to build it
Take a long position, then sell a call against it — or model it in the Strategy Builder.
FAQ
What's the risk of a covered call?
The underlying can still fall; the premium only cushions it. Your upside is capped above the sold strike.
Is it good for income?
Yes — it's a classic income strategy in flat-to-mildly-bullish markets.
Do I need to own the underlying?
Yes — that's what makes the sold call "covered" (vs a riskier naked call).