The covered call position (also called buy-write position) is created when you either buy or pre-own a stock and sell call options on that stock. If the call options are exercised the trader will sell the stock at the strike price, and if the call options are not exercised the trader will keep the stock. Usually, call options are sold out of the money. But, If you think that the stock price will go down, and you are still willing to hold your stock position, you can sell an in the money call option.
Covered Call Payoff Chart: In the above figure, we have underlying price on the ‘X’ or the horizontal axis and Payoff/profit on the ‘Y’ or the vertical axis.
|Underlying stock||Market Price (Rs)||12000|
|Call Options||Strike Price (Rs)||12100|
|Break Even Point (Rs.) (Stock Price paid - Premium Received)||11920|
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