Monetising Your Portfolio: A practical guide to covered calls

F&O Cues

You own shares of a potentially good company, hoping that it will bring fortune to you. However, they're sitting in your portfolio, not doing much. The stock isn't crashing, but it's not exactly taking off either. Just drifting sideways, maybe inching up a bit here and there. If this drags for a longer time, it becomes a source of frustration.

What if those shares could pay you while you wait?

That's exactly what a covered call does. It turns a sleepy stock position into an income generator. But like every strategy, it works best when you know the rules of the game.

What Is a Covered Call?

A covered call is simple. You own shares of a stock. You sell an out-of-the-money call option on that same stock. In return, you collect a premium upfront.

When to Use It

Use a covered call when you expect the stock to stay sideways or drift slightly higher. If you're bearish and the stock is part of your long-term portfolio, buying a put makes more sense to protect your position.

How It Works

Let's say you own 1,000 shares of a stock trading at ₹500. You sell a call option expiring this month with a strike price of ₹540 at ₹5 per share. If the lot size is 1,200, you receive ₹6,000 upfront (1,200 × ₹5).

Which Strike to Sell?

Sell a strike slightly out of the money. Conservative traders can go further out, which offers more safety but lower returns. The key is finding the balance between premium collection and the likelihood of the stock reaching that strike.

Three Scenarios

The stock stays below ₹540. You keep the entire ₹6,000 premium. Next month, sell another call and collect more premium. Repeat this as long as your view remains slightly bullish. This is the ideal outcome for covered call sellers.

The stock rises to ₹540 or above. Square off your sold call at a small loss and roll over to a further out-of-the-money strike like ₹560 or ₹580. This lets you stay in the trade while the stock continues moving up.

The stock drops below ₹500. Book profit on the ₹540 call, then roll down to a lower strike like ₹500 and sell a new call at the same expiry. The premium you collected cushions the loss from the share price decline.

The Thought Process

The goal is to earn a steady yield by selling options while the stock stays in a sideways-to-bullish zone. Think of it as earning interest-like income while holding stocks in your portfolio. Done consistently, these small premiums add up over time, turning dead capital into a working asset.

The Bottom Line

Covered calls won't make you rich overnight. They won't protect you if the stock crashes. But if you're holding shares that are moving sideways, they let you collect income while you wait.

The market rewards patience. Covered calls reward it too, one premium at a time.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.