cover calls-regular income from the stock market?

desi123 · #51 29th June 2007, 08:43 AM

Writing Covered Calls / Strangles / Straddles isnt childs play. For example, lets take the above example,

The trade is long NF @ 4290 short 4300 call Jun 07 @93 taken on 1-Jun 2007.

Personally, I dont agree with it for the simple reason that while upside is capped, downside isnt. I would rather reccomend Buying a In the Money Call and Selling either a At the money call or a Out of the Money Call depending upon the call of the market by the writer.

In India, since we dont have Stock Exercise, I personally dislike doing CC on Stocks since there is always a risk that the price where you got called is higher than the price at which you can exit the long position.

Cheers

DT

loosingstreak · #52 29th June 2007, 10:02 AM

Thanks for the reply desi123.

A fact is that most cc writers write for the premium and are quite willing to give up the upside. However the reason I have suggested this trade is to get insights how to mange this sort of trade while it is not moving in your favour.

I am posting the nifty chart for reference.

Even in the case of the spread you have suggested how would you have managed it given the nifty movement for june considering a long 4250 call short 4350 call taken on the same date.

Stock options are american and can be excercised at any time , I really did not get what you meant in the last sentence.

chander_rb · #53 29th June 2007, 01:47 PM

Quote:

Originally Posted by loosingstreak

Thanks for the reply desi123.

Stock options are american and can be excercised at any time , I really did not get what you meant in the last sentence.

Hi,

Index Options such as Nifty are European and can be exercised only on the day of expiry.

regards

arbbecee

desi123 · #54 29th June 2007, 06:24 PM

What I meant was that since there is a time gap btw Exercise and you being able to close the other leg of the position, there is a element of risk there.

Suppose you hold 1 Future of ACC and have sold a Call of say 660.00. Lets assume that ACC shot up today on some speculative news. Loss in option will be compensated by profit in future. Lets also assume that ACC denies the same either just before closing time or just after the close of market (3:30). The option buyer can close out the position at the closing price of the stock which in all proability will tank on open the next day. Another problem is that you dont come to know of the exercise until next trading day (unless your broker intimates you earlier) which leaves you at a tremendous risk.

Cheers

DT

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