The Rental Income Strategy: An Introduction to Covered Calls
Imagine you own a house and you aren't planning to sell it for many years. To make some extra money, you decide to rent it out. You still own the house, but you receive a monthly rent check. In the stock market, the Covered Call strategy works exactly like this. If you already own a large number of shares in a company (like Reliance or Infosys), you can rent them out to another trader in exchange for a fee. This fee is called a Premium. In 2026, many smart investors use this method to turn their quiet stocks into active income generators.
What is a Covered Call?
A Covered Call is a two-part strategy where you:
- Own the Stock: You must already have the shares in your Demat account (this is why it is called Covered you are protected because you have the actual goods).
- Sell a Call Option: You sell someone else the right to buy your shares at a specific price (the Strike Price) by a certain date.
The Trade-Off
In exchange for the rent (premium) you receive today, you agree that if the stock price goes very high, you will sell your shares at the agreed-upon Strike Price, even if the market price is much higher.
Key Features of the Covered Call
Feature
What it means
Income Leg
You get cash (the premium) credited to your account immediately.
The Cover
Since you own the shares, you don't need extra cash as a safety deposit for the trade.
Capped Profit
If the stock flies to the moon, you only keep the profit up to the Strike Price.
The Lot Size
In India, you must own a full Market Lot (e.g., 300 shares of Infosys) to do this.
Benefits of Using Covered Calls
1. Extra Monthly Income
This is like a bonus dividend. Even if the company doesn't pay a dividend, you can create your own synthetic dividend by selling a call option every month.
2. Lowering Your Purchase Cost
If you bought a stock at ₹1,000 and you collect a ₹20 premium, your effective cost drops to ₹980. This gives you a small head start.
3. Protection in Boring Markets
If the market is sideways and not moving at all, a regular investor makes ₹0. But a Covered Call trader keeps the premium, making a profit even when the market is lazy.
4. Getting Paid to Sell
If you were already planning to sell your stock at a higher price (say ₹1,100), you can sell a ₹1,100 Call Option. If the stock hits that price, you sell your shares as planned AND you keep the premium. It's like getting a tip for selling your stock.
The Risks: What Could Go Wrong?
While this is a low-risk options strategy, it is not no-risk.
- Opportunity Loss: If your stock suddenly jumps 20% in one day, you only get to keep the gain up to your Strike Price. You might feel FOMO (Fear Of Missing Out).
- Downside Risk: The premium you collect is small (maybe 1% or 2%). If the stock price crashes by 10%, the small premium won't protect you from a big loss in your share value.
Conclusion
The Covered Call is a fantastic Conservative strategy for 2026. It is best suited for long-term investors who are neutral or only slightly bullish on their stocks. It allows you to earn a steady side-income while you wait for your stocks to grow. However, you must be comfortable with the idea that you might have to sell your shares if the price goes above your target. It is all about trading unlimited excitement for steady, predictable income.