How to make a covered call on Zerodha

General
1

To make a covered call, how can i pledge my my shares to get leverage to sell its call option on a monthly basis?

Example:

Say I have a EQUITY HOLDING 1700 Shares (F&O lot size) of ICICIBAN @ 270Rs.

  1. How can i pledge these shares to sell the Call Option at a higher Strike Price on a monthly basis?

  2. How much additional margin would i need to sell the call ?

  3. If there is any leverage being offered are there any additional charges ?

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2

Future contracts can not be pledged for the margin ,

If it is EQ stock holdings, you can pledge the shares, the margin will get after haircut.

for ICICI bank the haircut percentage is 12.5%,

suppose if you are pledging 1 Lakh worth of stocks of ICICI Bank as per above you can get Rs.88500 of margin approx.

The Charges for Pledging is per stock/script (line iteam) Rs.60 (fixed)

you can use this collateral margin as normal. no any additional charges

3

1. How can i pledge these shares to sell the Call Option at a higher Strike Price on a monthly basis?

If you have Zerodha Demat, you can pledge/unpledge using back office pledge button.  Charges rs.60 for pledging/unpledging.

2. How much additional margin would i need to sell the call ?
The pledge value should be enough to be able to sell the call. However, some portion of your F&O trade margin has to be in cash.
3. If there is any leverage being offered are there any additional charges ?

Leverage would be the margin amount availabe as a result of pledging. Example:

1700 shares of ICICIBANK at 270 would be worth = Rs.459,000.

Haircut on ICICIBANK 12.50%

Margin available for F&O trading = Rs.401,625.

Margin required for selling ICICIBANK MAY 300CE = Rs56,104.

Additional charges = Rs.60 for pledging/unpledging.

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4

kindly let me know if you have done this and what was the exact procedure. I am planning to implement this from next month.

5

I am referring to EQ stocks bought in F&O lotsize quantity.

6

Oh… then it can be pledge., please check answer updated above.

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7

Yes I am aware it can be pledged. My question was more around the specifics of the process. Request clarifications to the 3 points in my questions.

8

check above and let us know if any other info required.

9

Thank you, that helps.
3 more of questions:

  1. What do I need to do to pledge my shares?
  2. What is the impact of pledging ? In what scenario would the pledged shares be automatically squared off?
    If I have [email protected]
    I write Nov-15 CE @300
    and the stock closes at 310 … Would be pledged share be squared off in this case?
  3. Once pledged how can i un-pledge the shares?
10

for pledging or un-pledging you have to write an email with detail about the shares you are pledging to with client and and qty etc.,
Only thing is needs to maintain margin with out shortfall.

11

how can there be any margin requirement when the stocks are pledged? Even if the spot price rises to 500 rupees, there should not be any problem as on the date of expiry the call option sold and the spot price will be the same. Can you please clarify?

2 Likes
12

Is this applicable even today? Can we still pledge the stocks? I heard that there is some new regulation that disallows this.

13

You can pledge stocks and use 50% margin out of it and another 50% from cash or liquidbees collateral.

14

After all whats the benefit of a covered call?

15

Incase of good long term allocations, you can actually make some short term income from the volatility of the stock without actually selling the stock.

Upside movements in stocks can be monetized and profits can be ceased at levels, without hurting Ltcg in long term stocks.
Downside movements, during times of certain risk , CC can be a fantastic tool to hedge a portion of the losses. esp -stocks with very low volatility.
Selling out quality companies due short term Panics can generate huge opportunity losses in Long run. for investors
Happy Investing
Team StockOrganics.

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