Covered Call

Covered Call is a strategy that is devised when the investor is holding shares in the underlying and feels that the underlying position is good for “medium to long term” but is moderately bullish on the near term.

In Covered Call, an investor sells a Call Option on a stock he owns. This leads to an inflow of premium for the investor. The profit increases as the underlying rises, but gets capped after it reaches the Strike price.

If the underlying crosses the Strike price, the Call Option will start making losses and payoff will be capped. Investor can use this strategy as an income in a neutral market.

Investor view: Neutral to bullish on direction.

Risk: Limited.

Reward: Limited.

Breakeven: Stock Price – premium received.

In the above chart, the breakeven happens the moment Nifty crosses 5250.

The reward is limited to 12500 [calculated as (Difference in adjacent Sell Call strike price and Underlying Buy price – premium received) * Lot Size]. The risk is unlimited.

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