Introductory Context
"This topic presents three complete trade examples on actively traded NSE stocks, one for each outcome category. Each example covers the complete entry analysis, the trade's development through the holding period, and the specific exit or roll mechanics. Real market data is used throughout -- specific stock names, prices, and dates reflect actual market conditions. "
Example 1 - Infosys, Covered Call Expires Worthless (Q2 2024)
Setting: July 2024. Infosys has been trading in a range between Rs 1,500 and Rs 1,650 for approximately six weeks after reporting in-line Q1 results. The stock is at Rs 1,575. The IT sector is in a 'wait and see' phase ahead of Q2 results expected in mid-October. India VIX is at 14.2 -- moderate. An investor holding 1,500 Infosys shares (purchased at various prices averaging Rs 1,420) wants to generate income during the expected sideways period.
Analysis: Infosys at Rs 1,575 has the prior high at Rs 1,650 acting as resistance. The stock is unlikely to break that resistance before Q2 results given the current neutral sector sentiment. The covered call opportunity: sell the September last-Tuesday 1,650 CE against 1,500 shares (5 lots, lot size 300 each). Premium for 1,650 CE with 6 weeks to expiry: Rs 28 per unit. Income: Rs 28 x 1,500 = Rs 42,000. Strike 1,650 is 4.76 percent above the current Rs 1,575 -- reflecting the prior high resistance level.
Trade: sold 5 lots of Infosys 1,650 CE (September last-Tuesday) at Rs 28 per unit. Total premium received: Rs 42,000. Effective cost basis reduced from Rs 1,420 to Rs 1,420 - Rs 28 = Rs 1,392 per share.
Development: Infosys traded between Rs 1,560 and Rs 1,630 through August and September. The stock never touched the Rs 1,650 resistance. India's IT export order environment remained mixed. At September expiry: Infosys settled at Rs 1,618. The 1,650 CE expired worthless. Full Rs 42,000 premium retained. Shares retained at Rs 1,618 market value. Cost basis now Rs 1,392.
Outcome: Rs 42,000 income on a share holding valued at approximately Rs 23.6 lakh (1,500 shares x Rs 1,575) = 1.78 percent return for 6 weeks. Annualised: approximately 15.4 percent from covered call income alone. The investor continues holding shares and evaluates a new covered call for October.
THE Q2 RESULTS TIMING RISK
Vikram had written covered calls on Infosys just before Q2 results were announced. He had sold the 1,700 CE expecting Infosys to stay below Rs 1,700 through October. Infosys beat Q2 estimates significantly, and the stock gapped up 7 percent on results day, crossing the Rs 1,700 strike and continuing to Rs 1,790 within the week. Vikram's shares were assigned at Rs 1,700 -- a satisfactory price (Rs 280 above his purchase price) plus the Rs 32 premium collected. But Vikram had to watch Infosys trade at Rs 1,790 knowing he had sold out at Rs 1,700. The lesson: never write covered calls with earnings announcements within the expiry period unless the strike is conservatively placed at or above the expected post-earnings price target. When earnings are within the expiry window, use a wider OTM strike or skip the covered call for that expiry cycle.
Example 2 - HDFC Bank, Covered Call Assigned (October 2024)
Setting: September 2024. HDFC Bank has been recovering from a multi-month consolidation phase, trading at Rs 1,720. An investor holds 2,200 HDFC Bank shares purchased at Rs 1,550. They write 4 lots of the October last-Tuesday 1,800 CE at Rs 42 per unit (lot size 550). Total premium: Rs 42 x 2,200 = Rs 92,400. Strike 1,800 is 4.65 percent above the current Rs 1,720.
Development: HDFC Bank benefited from strong HDFC Q2 results and broad banking sector positivity. The stock advanced from Rs 1,720 to Rs 1,760 in the first week, then to Rs 1,820 in the second week. By the third week, HDFC Bank was at Rs 1,840 -- above the Rs 1,800 strike with 8 days to expiry. The investor assessed the rolling option: buy back 1,800 CE at Rs 53 (Rs 40 intrinsic + Rs 13 time value), sell 1,850 CE (next month) at Rs 60. Net credit: Rs 7 per unit = Rs 15,400 credit. However, the investor determined that Rs 1,800 was already a satisfactory exit price (Rs 250 per share gain from Rs 1,550 cost) and chose to accept assignment rather than roll.
Outcome: shares assigned at Rs 1,800. Capital gain: (Rs 1,800 - Rs 1,550) x 2,200 = Rs 250 x 2,200 = Rs 5,50,000. Plus premium received: Rs 92,400. Total return: Rs 6,42,400 on 2,200 shares originally costing Rs 34,10,000 = 18.8 percent total return (capital gain plus covered call income). HDFC Bank subsequently traded at Rs 1,900 -- the investor missed the Rs 100 per share advance above the assignment price. Acceptable outcome: the investor had pre-committed to the Rs 1,800 price as acceptable when writing the call.
Example 3 - Reliance Industries, Covered Call Rolled (August 2024)
Setting: August 5, 2024 (during a brief global market correction driven by the Japan carry trade unwinding). Reliance Industries falls sharply from Rs 3,050 to Rs 2,850 in three days. An investor who had written a covered call for August expiry -- the 3,000 CE at Rs 45 -- sees the call become deeply OTM as the stock falls. The call is now trading at Rs 8. The investor evaluates rolling: the covered call income objective should be maintained despite the stock's decline.
Roll action: with 12 days to August expiry, buy back the 3,000 CE at Rs 8 (recovering most of the option position). Sell September 2,900 CE (now ATM given the stock at Rs 2,850) at Rs 72. Net credit: Rs 72 - Rs 8 = Rs 64 per unit x 250 shares = Rs 16,000 net credit. The roll moves from a nearly expired, virtually worthless call to a fresh monthly call that generates significant income at the current lower stock level.
Subsequent development: Reliance recovered from Rs 2,850 to Rs 2,970 by late September. The 2,900 CE (sold at Rs 72) was approaching the Rs 2,900 strike. With 9 days to September expiry: 2,900 CE trading at Rs 78. Assess roll: sell October 3,000 CE at Rs 65. Net debit: Rs 65 - Rs 78 = -Rs 13. The investor accepts the slight net debit roll to move the strike back up to Rs 3,000 (above the approaching Rs 2,970 stock level), maintaining shares and collecting a new monthly premium. Total premiums across August (partial) + September + October = Rs 45 + Rs 64 (net) - Rs 13 (net) = Rs 96 net per share of accumulated income across three months.
Key Lessons From All Three Examples
From Example 1 (Infosys, expired worthless): the ideal outcome delivers steady monthly income on a range-bound stock. The 6-week window matched the expected sideways period precisely. The lesson: identify the expected range-bound window accurately before committing to the strike. Writing covered calls on stocks where the next major catalyst (earnings) is within the expiry window carries event risk that requires wider OTM strikes.
From Example 2 (HDFC Bank, assigned): assignment at the pre-agreed price plus premium is not a failure. The investor made 18.8 percent total return. The 'regret' of missing the subsequent Rs 100 advance is the Disposition Effect (Topic 9.3) applied to covered calls. The pre-commitment to the Rs 1,800 price as acceptable (made at the time of writing the call) is the correct reference point, not the subsequent market price.
From Example 3 (Reliance, rolled): rolling through adversity (a sharp market correction) maintains the covered call income programme by adapting the strike to the new lower stock level. The roll from the worthless OTM call to the new ATM call capitalised on the correction's elevated VIX (the new September call's Rs 72 premium was significantly higher than the Rs 45 pre-correction call). The crisis created a rolling opportunity that enhanced total income.