Option Strategy: Covered Call

Option strategy In covered call strategy call option is sold against already own stocks. Professional investors write covered calls to increase their investment income.
For example, assume that on 01, January a trader Mr A owns 100 shares of XYZ company. XYZ currently trading at Rs 100 but Mr. A pretty sure it will stay below Rs 105.
To generate a little bit of extra income, he sells Mr. B a call option with February expiration date and a strike price of Rs 105. The Call option is priced at Rs 3 per share and it controls 100 shares. By selling the call option, Mr. A receives a Rs 300 premium today in exchange for the possibility that he will have to sell XYZ stock to Mr. B for Rs 105 between now and the February expiration date. By buying Mr. A’s call option for Rs. 300, Mr. B has the right (but not the obligation) to buy 100 shares of XYZ from Mr. A at Rs 105.
Now consider the following scenarios:
If XYZ trades at Rs 103 at expiration. Mr. B option expires “out of the money” and is worth zero. he lost Rs 300 on his trade.
Mr. A gets to keep the Rs 300 premium plus his shares are now worth Rs 300 more than they were worth on January 1. Mr.A made Rs 300 in cash and records a Rs. 300 paper profit.
If XYZ trades at Rs 110 at expiration. Mr. B’s option is “in the money” and Mr. A is obligated to sell his 100 shares for Rs. 105 per share, even though the stock trades at Rs. 110. Because he gets the shares from Mr.A for Rs. 105 and can turn around and sell them for Rs. 110, Mr B trade generated Rs. 500 minus the Rs. 300 he paid for the option, for a total gain of Rs.200.
Mr. A’s 100 shares just went up to Rs 110 from Rs 100, for Rs 1000 gain, But because he owes Mr.B’s 100 shares of stock and has to sell them to him for only Rs 105, he loses Rs 105 on that leg of the trade.
Mr. A gained Rs 1000 – Rs 500 (because he must buy 100 shares of XYZ stock at Rs 110 and sell them to Mr.B at Rs 105) plus Rs 300 premium(From Call option selling)= Rs. 800.
So you can see that Mr. A has limited his upside potential. Covered calls are most common among investors who want to generate additional income from a particular holding.