Zerodha Covered call Hedge

Covered call margin benefit

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A covered call (long stock + short call on the same underlying) earns the margin benefit because the underlying stock provides the delivery commitment for the short call. The strategy is popular for generating additional income on long-term equity holdings.

Structure

Covered call = Long stock + Short call (same underlying).

Example:

  • Hold 100 RELIANCE shares (long).
  • Sell 1 RELIANCE 2950 CE (short call).

If RELIANCE rises above 2950 by expiry:

  • Stock gains capped at 2950 (the call gets exercised).
  • Premium received is the profit cap.

If RELIANCE stays below 2950:

  • Keep the stock + keep the premium.

Margin benefit

For the short call leg standalone:

  • SPAN + Exposure for naked short call: ~Rs 50,000-80,000 (depending on contract).

For the covered call:

  • Stock provides physical-settlement hedge.
  • Short call margin reduced to ~Rs 5,000-10,000 (mostly just operational margin).

The savings: ~Rs 40,000-70,000 per lot.

How Zerodha applies it

Zerodha automatically recognises the covered call structure:

  1. Pledge the underlying stock for collateral.
  2. Short the call option.
  3. SPAN engine recognises the hedge.
  4. Reduced margin applied.

The exact mechanics may require:

  • Stock to be in CNC delivery (not MIS / T1).
  • Sufficient quantity to fully cover the call (lot size match).

When the benefit applies

  • Same expiry month for stock and call.
  • Stock quantity = lot size (for one short call).
  • Stock fully pledged or otherwise recognised.

For partial coverage (selling 1 call against 50% of the underlying shares), only the covered portion gets the benefit; the uncovered portion is naked.

Risk profile

Covered call risks:

  • Limited upside (capped at strike).
  • Stock downside unchanged (you still own the stock).
  • Time decay works in seller’s favour.

Suitable for:

  • Stable / range-bound view on the stock.
  • Generating income on long-term holdings.

Tax treatment

Covered call P&L:

  • Short call P&L taxed as business income (F&O).
  • Stock P&L taxed as capital gains.
  • Treated separately.

For complex tax situations involving multi-strategy positions, consult a Chartered Accountant before filing.

See also

External references

References

  1. Zerodha, Covered call margin treatment, support.zerodha.com.
  2. NSE Clearing, SPAN hedge methodology, nseclearing.com.
  3. SEBI, F&O margin framework, sebi.gov.in.

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