Covered call: what’s in it for you

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: square-off the short position to book the profit and carry forward your long position, with the expectation that stock would go up.

In different situations

On expiry day, if the option is still out of money, it is likely that it will just expire worthless and not be exercised. In this case, you do nothing. If you still want to hold the position, you could "roll out" and write another option against your stock further out in time. Although there is the possibility that an out of the money option will be exercised, this is extremely rare.

If the option is in the money, you can expect the option to be exercised. Depending on your brokerage firm, it is very possible that you don't need to worry about this; everything will be automatic when the stock is called away. What you do need to be aware of, however, is what, if any, fees will be charged in this situation. You will need to be aware of this so that you can plan appropriately when determining whether writing a given covered call will be profitable.

Let's look at a brief example. Suppose that you buy 100 shares of XYZ at Rs 38 and sell the July 40 calls for Re 1. In this case, you would bring in Rs 100 in premium for the option you sold. This would make your cost basis on the stock Rs 37 (Rs 38 paid per share - Re 1 for the option). If the July expiration arrives and the stock is trading at or below Rs 40 per share, it is very likely that the option will simply expire worthless and you will keep the premium (in cash). You can then continue to hold the stock and write another option for the next month if you choose.