Short answer: A covered call is a strategy where you hold shares of a stock and sell a call option on those same shares, collecting an upfront payment called the premium. A call option gives its buyer the right to buy your shares at a fixed price, called the strike price, by a set date.
Last reviewed: 14 November 2026
At a glance
| Term | What it means |
|---|---|
| Covered call | Holding shares and selling a call option on the same shares |
| Strike price | The price at which the call buyer can buy the shares |
| Premium | The upfront amount the seller collects from the buyer |
| Out-of-the-money | A strike price set above the stock’s current price |
| Buy-write | Buying the shares and selling the call at the same time |
How does the trade work step by step?
First, you own shares of a company. Second, you sell a call option on those shares, usually at an out-of-the-money strike price. An out-of-the-money strike sits above the current market price of the stock.
The buyer pays you the premium at the time of the trade. That payment is yours to keep, whatever happens next. The strike price is usually a level at which you are already willing to sell your shares.
What happens if the stock stays at or below the strike price?
If the stock stays at or below the strike price, the buyer normally does not exercise the call. Exercising means using the right to buy the shares at the strike price, which makes no sense when the market price is lower.
In this case you keep the premium and you keep the shares. You can then sell another call in a later period if you choose to, though that is a separate decision with its own trade-offs.
What happens if the stock rises above the strike price?
If the stock rises above the strike price, the buyer can exercise the call. You must then sell your shares at the strike price, even if the market price is higher.
This is the main trade-off of the strategy. You give up further gains above the strike price in exchange for the premium you received. The premium is a fixed amount, so it does not grow if the stock keeps rising.
Worked example with hypothetical numbers
The figures below are invented for illustration only. They are not drawn from any real stock or market, and they leave out brokerage, taxes and other costs.
Suppose you hold 100 shares, bought at ₹500 each, a total of ₹50,000. The shares now trade at ₹500. You sell one call option on the 100 shares with a strike price of ₹520, receiving a premium of ₹10 per share, which is ₹1,000 in total.
- Stock ends at ₹510: The buyer does not exercise. Your shares are worth ₹51,000, plus the ₹1,000 premium, for ₹52,000 in total.
- Stock ends at ₹560: The buyer exercises. You sell at ₹520, receiving ₹52,000, plus the ₹1,000 premium, for ₹53,000 in total. Without the call, the shares would have been worth ₹56,000. The ₹3,000 difference is the upside you gave up, net of the premium.
- Stock ends at ₹450: The buyer does not exercise. Your shares are worth ₹45,000, plus the ₹1,000 premium, for ₹46,000. Without the call, you would have ₹45,000. The premium cushions the fall by ₹1,000 but does not prevent the loss of ₹4,000 from your starting value.
The example shows that the premium is limited. In each scenario, it adds the same fixed ₹1,000, which is small compared with the movement in the shares.
Who is the strategy generally suited to?
The strategy is generally suited to an investor who is neutral to moderately bullish on the stock in the near term. Neutral means you do not expect a big price move either way, and moderately bullish means you expect a modest rise at most.
Such an investor also holds a positive long-term view of the company. This matters because the shares may be sold at the strike price, so the investor must be comfortable with that outcome.
What is a buy-write?
When the shares are bought at the same time the call is sold, the strategy is called a buy-write. The result is the same covered call position, but the trade is entered as one step rather than two.
The distinction matters mainly for how the trade is recorded and tracked. The payoff, with its capped upside and the cushion from the premium, works the same way.
What are the catches?
The biggest catch is the cap on gains. If the stock rises sharply, the premium may be far smaller than the profit you give up, as the example above shows.
The second catch is that the premium does not protect you from a large fall. The shares still lose value if the stock drops, and the premium only offsets part of that loss. Before using the strategy, it helps to work out the numbers for both a rise and a fall, as shown above.
Frequently asked questions
Do I keep my shares if the buyer does not exercise the call?
Yes. If the stock stays at or below the strike price, the buyer normally does not exercise the call, so you keep both the premium and the shares.
What happens if the stock rises above the strike price?
The buyer can exercise the call, and you must sell your shares at the strike price. You keep the premium, but you give up further gains above the strike price.
Is a buy-write different from a covered call?
A buy-write is a covered call entered at the same time as the share purchase. When the shares are bought at the same time the call is sold, the strategy is called a buy-write.
Sources and last check
Facts in this article were checked against the sources below on 14 November 2026. Rules and figures can change; check the primary source before acting.
- upstox.com (broker education)
- kotakneo.com (broker education)
- groww.in (broker education)
- icicidirect.com (broker education)
This article is general information, not investment advice. MyFinanceBandhu is not a SEBI-registered investment adviser.