Covered Call

A covered call consists of two trades, first a purchase of stocks and second selling an out of the money call for a marginal profit. The break even gets reduced by the written call's value. The maximum profit gets capped at the sum of written call's strike and its value. The profit above the written strike's value is sacrificed. The strategy under performs above the maximum profit value.

To take an example, TCS is purchased at the current market price of 2191. The break even for the shares alone would be 2191. On selling a 2300 call for 30, the break even is now 2161 and the max profit is capped at 2330. Over 2330, the strategy under performs.

Sample trade:

TCS
Lot Size = 125
Share price = 2191
Share Value = 273875
2300 CALL = 30
Margin to write CALL = 39520.81
Amount received on writing the CALL = 3750
Break even = 2191 - 30 = 2161
Max profit = 2300 + 30 = 2330
Total invested amount = 313395.81
Profit  (==2191) = 3750 / 313395.81 = 1.19%
Max profit (>=2300)= 17375 / 313395.81 = 5.54%
Annualized profit range = 15.34% - 91.07%
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