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Please clarify the following points regarding Covered Calls: When I write a covered call, how is the settlement effected? Do I have the option to give delivery of shares? — S. Padmanabhan

A covered call is initiated by taking a long position (buy) in the underlying security and a short position (sell) in a call.

# * In a covered call, as you have a short position, settlement is effected on the exercise of the call, which will be, solely, at the discretion of the long call holder.

# * Options on individual stocks are American in nature. Hence, they can be exercised any day before the expiry of the contract.

# * If you hold an in-the-money call, there are chances of your being assigned on a random basis, if the call is exercised. The allotment of exercised positions to open short positions is done on a random basis.

# * If this in-the-money call is not exercised by the expiry date, (which is usually the last Thursday of the month in NSE), all in-the-money calls are automatically exercised. Hence, the in-the-money call would be assigned to you.

# * If you hold an out-of-the-money call, then the call would expire worthless.

On being assigned, you have to settle the difference in cash, as all contracts are cash-settled on NSE.

Only in the case of physical settlement, you have to take delivery of the underlying stock in the event of being assigned.

# * To avoid the assignment of the call, you have to square off the covered call by selling the underlying and taking a long position in the call.

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