What is Call Writing

Call writing has become one of the most widely used strategies in India’s Futures and Options segment, especially among traders looking for consistent income in a market that often moves sideways. Whether you're a beginner trying to understand what is called writing or an investor wanting to earn more from your existing holdings, knowing how this strategy works can significantly improve your trading decisions.

In this guide, we break down call writing meaning in detail, its types, objectives, benefits, margin requirements, and examples.

Call Writing Meaning

In the Indian stock market, call writing (or selling a call option) means giving a buyer the right, without obligation, to buy a stock or index from you at a fixed strike price on expiry. In return, the call writer receives an upfront premium, which is the maximum possible profit from the trade.

Important Note: To write options (including covered calls), traders must have their brokerage account enabled for F&O trading. This requires income or net-worth documentation as per SEBI regulations.

Exercise Style and Settlement in India

• All exchange-traded equity and index options in India are European options; they can be exercised only on the expiry date, not before.
• Index options (e.g., Nifty, Bank Nifty, FinNifty, Sensex) are cash-settled.
• Many stock options are subject to mandatory physical settlement if they expire in the money (ITM). This means the seller must deliver shares (for short calls) or take delivery (for short puts), unless the position is squared off before expiry.

This distinction is essential to avoid confusion between exercise style and settlement method.

Simple Meaning

Call writing means selling a call option and earning a premium, with the expectation that the price will remain below the strike price by expiry.

Expiry Cycles in India

Indian F&O contracts follow two major expiry cycles:

• Monthly Expiry: Last Thursday of every month
• Weekly Expiry: For Nifty, Bank Nifty, FinNifty, Sensex, and many liquid stocks

If a holiday falls on expiry day, the settlement shifts to the previous trading day.

Shorter expiries experience faster time decay, making them popular for call writers.

Breakeven Point in Call Writing

The breakeven point tells you the exact market price level at which your call writing position neither makes a profit nor a loss. It is a crucial number because it helps you understand how much room you have before your call option starts causing losses.

When you sell (write) a call option, you immediately earn a premium. This premium acts like a cushion; it protects you from small upward movements in the stock or index.

A call writer starts losing money only when:

Market Price at Expiry > Strike Price + Premium Received

This is why the breakeven point is defined as:

Breakeven Point = Strike Price + Premium Received

It shows the maximum price up to which the call writer remains safe or profitable.

The Call Writer’s Advantage: Time Decay (Theta)

Every option premium is made up of two components: Intrinsic Value and Time Value. As the option approaches expiry, its Time Value naturally decreases. This reduction is known as Time Decay, or Theta.

How Theta Supports Call Writers

Time decay consistently works in favour of call writers. Even if the underlying stock or index does not move, the option’s value erodes with each passing day, improving the chances of the call expiring worthless. The effect becomes more pronounced in the final weeks, and especially in the final days before expiry.

Weekly index options such as Nifty and Bank Nifty experience particularly rapid time decay, making them popular among option sellers seeking regular income.

For beginners, understanding Theta is important because it highlights why call writing can remain profitable even in flat or slow-moving markets.

Types of Call Writing in the Indian Stock Market

When it comes to call writing in India, traders generally use two main approaches: Covered Call Writing and Naked (Uncovered) Call Writing.

1. Covered Call Writing: Covered call writing is considered the more conservative and beginner-friendly approach. A covered call is created when a trader already owns the underlying shares and sells a call option on those same shares. The ownership of the shares acts as a natural hedge against the obligation created by writing the call option.

Key Characteristics

• Lower Risk: Losses are limited because the trader already holds the shares and can deliver them if the option expires in the money.

Note: The "lower risk" claim is relative to naked calls. Note that this strategy caps potential upside beyond the strike price, and losses on the underlying stock can still exceed the premium buffer if the stock falls sharply.

• Income Generation: The strategy allows investors to earn regular premium income on long-term holdings.
• Best Market Conditions: Covered calls are most effective in sideways to moderately bullish markets, where the upside is limited but stable.

Example

Assume you hold 300 shares of TCS at ₹3,600 and write a call option with a strike price of ₹3,700. If the price remains below ₹3,700 at expiry, you retain the shares and keep the entire premium received.

Note: Lot sizes vary across stocks and may change periodically. Example values are illustrative.

Suitability: Covered call writing is appropriate for -

• Long-term investors
• Beginners entering F&O
• Traders seeking potential for regular income in range-bound markets

2. Naked (Uncovered) Call Writing: Naked call writing is a high-risk strategy and should be attempted only by experienced traders. A naked call is initiated when a trader sells a call option without owning the underlying shares. Since there is no hedge or protection, the trader is exposed to theoretically unlimited losses if the price moves sharply upward.

Key Characteristics

• Unlimited Loss Potential: If the underlying rises significantly, the call writer must cover the difference between the market price and strike price, resulting in substantial losses.
• High Margin Requirement: Indian brokers block capital based on exchange risk parameters (SPAN) + exposure/additional/peak margin blocks as per current SEBI norms, which is significantly higher for naked positions due to their inherent risk.
• Margin Consequence: Brokers may also increase intraday margins for short options near expiry and during high volatility, so maintaining sufficient capital buffers is prudent to avoid forced square-offs.

Note:

Penalty for Margin Shortfall: If the market moves against a Naked Call position and your available capital falls below the required margin, your broker will issue a margin call. Failure to meet this on time can lead to the broker forcefully closing (squaring off) the position and the trader facing a penalty imposed by the exchange (NSE/SEBI) for the margin shortfall. This penalty adds a significant financial risk beyond the market loss itself.

• Suitable Market Conditions: This strategy is generally used in range-bound markets by traders with strong risk management and intraday monitoring capabilities.

Example

A trader writes a Nifty 22,200 CE without holding any hedge. If Nifty exceeds the strike price sharply, the position can incur escalating losses, while the premium earned remains capped.

Suitability: Naked call writing is suitable only for -

• Skilled F&O traders
• Traders with high capital and robust risk management
• Advanced strategies such as spreads or volatility-based trades

Additional Risks for Call Writers

1. Vega Risk (Volatility Risk): A sudden spike in volatility can sharply increase option premiums, causing losses even if the price stays near the strike.

2. Gamma Risk Near Expiry: As expiry approaches, small price movements create large changes in P/L for short options. Gamma is especially dangerous for strikes close to spot during weekly expiries.

Understanding these risks is essential for realistic expectations.

Objectives of Call Writing

Call writing serves several practical purposes for traders and investors in the Indian derivatives market:

1. Earning Premium Income: The primary objective of call writing is to generate immediate premium income. Traders and long-term investors often use this strategy to earn consistent returns, especially during range-bound or low-volatility phases in the Indian market.

2. Enhancing Returns on Existing Holdings: Investors who already own shares can use covered call writing to monetise their long-term positions. This allows them to earn additional income on stocks they plan to hold, even when the price is moving sideways.

3. Hedging Short-Term Price Movements: Call writing offers a limited hedge against minor declines or stagnant prices. The premium received provides a cushion, helping offset small losses and reducing short-term portfolio volatility.

4. Benefiting from Time Decay (Theta): An important objective is to take advantage of time decay. As expiry approaches, the option’s time value reduces each day. For call writers, this natural decay works in their favour, increasing the probability of profit, particularly in weekly expiry contracts.

5. Expressing a View of Limited Upside: Traders who believe an index or stock will not rise significantly may write calls to profit from a neutral or mildly bearish outlook. The strategy works best when the underlying remains within a predictable range.

6. Reducing Overall Portfolio Volatility: Call writing helps smooth portfolio returns by providing a steady income stream and lowering the impact of short-term price fluctuations. This makes it a useful tool for investors seeking more stable performance.

7. Building Advanced Credit Strategies: Advanced strategies like straddles, strangles, and credit spreads are constructed using both call writing and put writing. They are designed to profit specifically from defined-risk or defined-range market movements.

Benefits of Call Writing

Call writing offers several meaningful advantages for traders and investors in the Indian F&O market:

• Steady Premium Income: The upfront premium provides a consistent income stream, especially during sideways phases that frequently occur in Indian markets.
• Better Returns on Long-Term Holdings: Covered call writing enables investors to earn additional income on stocks they already own, improving the overall yield even when prices remain flat.
• Cushion Against Small Price Drops: The premium acts as a buffer against minor declines in the stock or index, helping reduce short-term portfolio volatility.
• Benefit from Time Decay (Theta): As expiry approaches, the option’s time value erodes daily. This natural time decay favours call writers, particularly at weekly index expiries like Nifty and Bank Nifty.
• Strong Performance in Sideways Markets: Call writing tends to work best when prices don’t rise sharply. In range-bound or mildly bearish markets, premiums fall steadily, improving the chances of profit.
• More Stable Portfolio Returns: The additional premium income reduces reliance on capital gains alone, making portfolio performance more predictable over time.
• Margin Efficiency for Covered Calls: In India, covered calls are treated as hedged positions, resulting in much lower margin requirements compared to naked call writing. This makes the strategy more accessible and capital-efficient for long-term investors.

How Call Writing Works: Step-by-Step with Illustrative Example

Call writing may appear complex at first, but the process is straightforward once you understand the flow. Here’s a simple step-by-step explanation of how the strategy works in the Indian F&O market.

Step 1: Select the Stock or Index

The trader first chooses the underlying asset, such as Nifty, Bank Nifty, or a stock like TCS, Infosys, or Reliance, based on their market view. In call writing, the trader typically expects the price to stay stable or rise only slightly.

Step 2: Choose the Strike Price

The trader selects a strike price above the current market price. For example, a stock trading at ₹1,000, and the trader writes a ₹1,050 call. The chosen strike reflects the trader’s belief that the price will stay below this level.

Step 3: Receive the Premium

Once the call option is sold, the trader receives a premium upfront. This premium is the maximum profit the call writer can earn from the position.

For Example:

• Premium received = ₹20 per share
• Lot size = 300 shares
• Total premium = ₹6,000

Step 4: Monitor Price Movement Until Expiry

The outcome depends on where the price settles at expiry.

Case A: Price stays below ₹1,050 (Out-of-the-Money)

• The option expires worthless.
• The call writer keeps the entire premium.

Case B: Price rises above ₹1,050 (In-the-Money)

• The call writer incurs a loss.
• The precise profit/loss for the call writer is calculated as:

P/L = Premium received − max (0, S - K)

Where: S is the Final Settlement Price, and K is the Strike Price.

Loss is adjusted in the F&O account, not through physical delivery (except for stocks where physical settlement applies; in practice, beginners should assume cash settlement).

Strong Warning on Physical Settlement: While index options are always cash-settled, a growing number of stock options contracts are subject to mandatory physical settlement on expiry. If you hold a short call on such a stock on expiry day, you may face sudden, extremely high margin calls or be forced to deliver/receive shares, which can be catastrophic for beginners. Always check your broker's policy regarding physical settlement for stock derivatives.

Step 5: Calculate Profit or Loss

Maximum Profit: Premium received → fixed and capped.

Loss Scenario: Loss increases as the price rises above the breakeven point.

Breakeven Point = Strike Price + Premium Received

In our example:

1050 + 20 = ₹1,070

If the stock expires below ₹1,070, the trader remains profitable.

Call Writing Example

• Stock Price Today: ₹1,000
• Call Written: ₹1,050 CE
• Premium Received: ₹20
• Lot Size: 300 shares
• Breakeven: ₹1,070

Scenario 1: Expiry Price = ₹1,030 (Below Strike)

• Option expires worthless
• Profit = ₹6,000 premium

Scenario 2: Expiry Price = ₹1,060 (Above Strike, but below Breakeven)

• Intrinsic value = ₹1,060 – 1,050 = ₹10
• Loss = ₹10 × 300 = ₹3,000
• Net Profit = Premium ₹6,000 – Loss ₹3,000 = ₹3,000

Scenario 3: Expiry Price = ₹1,100 (Above Breakeven)

• Intrinsic value = ₹1,100 – ₹1,050 = ₹50
• Loss = ₹50 × 300 = ₹15,000
• Net Loss = ₹15,000 – ₹6,000 premium = ₹9,000

Conclusion

Call writing is a powerful strategy for Indian traders looking to earn regular income, hedge positions, and improve portfolio performance. Once you understand what call writing means, margin rules, expiry cycles, and how time decay works, you can use this strategy confidently, especially with covered calls.

Beginners should start slowly, avoid naked calls due to high SPAN + Exposure margins, and focus on risk management.

Disclaimer: This article is for educational purposes only and does not constitute investment, trading, or financial advice. Options trading involves significant risk, and traders should assess their risk tolerance, conduct their own research, or consult a certified financial advisor before entering the F&O market.