How to write a call option/sell a call option for shares that you already have (covered call option)

General
1

I tried searching for this for a while. It seems quite simple with many other brokerages, but I couldn’t find an answer at zerodha.

If anyone is already doing this, could you help with understanding and actually performing covered call option?

An example of what needs to happen (just to clarify the question)

I have 1k shares of TCS at (assume) INR 1500 each

There’s a option in the market with a strike price of INR 2400.

Now, how can I sell a call option with the shares I already have, rather than selling on margin.

And how is the premium deposited in the zerodha account?

PS. I’ve been trading for quite a while but this is the first week of getting into F&O. Not sure if Pledging is the right word for what I’m looking for, but any help would be really appreciated! Thanks again.

2

You need to have cash balance in your trading account. The amount is calculated as given below . https://zerodha.com/margin-calculator/SPAN/.

3

Hello,

A covered call only means that when you write an option, it is covered by an equity position of the same underlying. Here, the benefit is that if the stock price goes up, the equity price will go up and cover for the loss in the written call option. This cover will not be equivalent as the time value of the option depreciates and eventually becomes zero at expiry, but it will be a cover nonetheless and it will be less risky than a naked written call.

You can pledge any share that is allowed at Zerodha for which you will receive a margin after a haircut. This margin can be utilized for writing any call option(writing 1 lot of a call option will require the same margin as that required for taking a 1 lot future position in the same stock.) Ideally, 50% of this amount should be available in cash and the other 50% in pledged value.

To learn more about pledging, do read the below QNA post:
http://tradingqna.com/51654/stock-pledging#a51804

Happy trading!

3 Likes
4

Hello All - Thanks for all the explanation given above.

I still have 1 query with regards to this

Query -

Why 50% of the amount should be available in cash and the other 50% in pledged value.

Thanks

5

Thanks for your answer hari babu. The calculator helped with some calculations for margins, but I wanted to know a step by step process to create a covered call with the securities that you already have at zerodha. It would be great help if you can share the process :slight_smile: I’ve been trying hard to understand the process or find the process for that matter.

6

Assume you have one lot of shares in your holding. Check lot size of your stock. For SBI lot size is 3000
So you should have 3000 shares in your demat.
Now select OTM call strike at least three steps away from spot price.
Place a sell order of that option.
Wait till expiry.
You can do this only when the stick is not going to have any upside movement till expiry or may go down. You should not do this on bullish stocks.

7

Thanks for your answer Bharat. Your answer did clear a bit of the confusion but correct me if I’m wrong here…
To create a covered call, you first

  1. Pledge the number of shares (assume 1 lot or 1000 shares)
  2. Write a call option
  3. Receive the premium when your option is bought.
  4. Unpledge/transfer the shares at the strike price when the option expires
    Is the above process right ? Or does something need to be added ?
8

Covering a call has nothing to do with pledging.

9

you can read here
https://www.nseindia.com/content/assist/asst_Margins_faq.pdf
for daily settlement of MTM margins cash margin is required.