cover calls-regular income from the stock market?

#1
Hi,

i came across this startegy on the net about being long in the stock and writting calls against the same also popularly known as covered calls. so i was just thinking about buying a nifty future and writing an option on the same at the nearest out of the money and further roll it up or roll it down depending on the market movement. what i would like to know is whether this strategy is profitable in the long run (probably in a year's time) also i came to know that this strategy is helpful when the markets are neutral and slightly bullish and also offers a limited downside protection. i would like to know from the senior members in the forum thier comments and suggestions. i am also back testing this strategy with the historical data on Nifty futures and options from nse website.

Thanks and Regards

Sundar C
 
#2
Hi Sundar

It is good strategy when the market is side ways or slightly bearish. The whole idea behind this is to let the call sold expire worthless. One should implement this strategy on the stocks one already own as oppose to buying new stock and than writing calls.

If you are looking for regular income, please read the "Delta Netural Strategy- Short Strangle" on this form. The trade in progress is likely to expire on August 25, 2005 and soon after that new trade will start with Long Stock and Long put. Such stratgey are going to be beneficial for regular income.

Good Luck

WasteJ
 
#4
Hi Snsagar,

Covered call is written when you own a stock and you feel that it is not going to go up any further, or even it will correct little bit, or will go sideways. During such periods one tries to sell an out of money call option, in order to generate some income, cover the downward correction etc.

Example:

You own Tata Tea (CMP 820) you feel it is not likely to go up any further for short time, or it will enter a correction phase and therefore, it is likely to come down, or it has had good upward run and at the current levels it will rest for a while. What ever may be the reason, it should not be bullish reason. Under such circumstances you will sell a call option for strike price of 830-850 and will collect the premium for that call. If you proved right than you will keep the premium and if you were wrong than the stock will be assigned to the buyer of the call at the strike price.

In India the options are settled in cash, therefore, the short option will settle in cash, only if it is in the money.

I hope this will help you.

Wastej
 
#5
sundar_c7 said:
Hi,

i came across this startegy on the net about being long in the stock and writting calls against the same also popularly known as covered calls. so i was just thinking about buying a nifty future and writing an option on the same at the nearest out of the money and further roll it up or roll it down depending on the market movement. what i would like to know is whether this strategy is profitable in the long run (probably in a year's time) also i came to know that this strategy is helpful when the markets are neutral and slightly bullish and also offers a limited downside protection. i would like to know from the senior members in the forum thier comments and suggestions. i am also back testing this strategy with the historical data on Nifty futures and options from nse website.

Thanks and Regards

Sundar C

At these levels, covered call writing is not really among the best of ideas in the equity derivatives in India.

You might still try it for Nifty. In case of stocks don't forget that equity derivatives in India are not delivery settled, it might result in unwarranted losses in the days preceding settlement. Also the high volatility in the underlying might expose you to unwarranted risks.

Good Luck
 

sh50

Active Member
#6
I have one question for [email protected]. Our broker advices writing both call and put options. Call on the higher side and put on the lower side. In the Tata tea example that you have given, he would also specify a lower limit below which the stock is not likely to go.

Then the deal is squared up depending upon which way the share moves. In a truly sideways mkt, one is rewarded both ways.
 

beginner_av

Well-Known Member
#7
Hi Sundar,
My advice is that u write a covered call on stocks and not against Nifty futures as Nifty would be extinguished at the end of the period and so u can get huge losses, but u can keep the stock and keep writing against it if it moves sideways, pyramid if it moves up aor get out if it breaches ur stop loss level depending ur style of trading.
One word of caution - in certain broks like Indbulls, they will stop u from taking fresh positions in many common stocks if theres even a minor upmove. That problem is not there against Nifty.
 

rangarajan

Well-Known Member
#8
my understanding of covered call is that you sell a call at a higher strike price & buy one at a lower price simultaneously so that yr profit is limited to the difference bet the spread in strike prices less the diff in premium paid.yr loss is the diff in premium only.But when u write a call u have to pay margin money plus the m to m loss.
coming back to the example,when u buy a share at a price and u sell the future of the same if it commands a premium for the same expiry,u make a fixed profit, immaterial of the movement direction of the share.At times it may work out to 30-40% in a bull mkt calculated annually.
ranga
 
#9
Hi sundarC7

im also studying covered call strategy .And have implemented it in Andhrabank,maruti and tatamotors.they all were profitable trades only.

pls share ur exp in covered call strategy
bye
babu
 
#10
Sup ida,
They may have all been profitable trades. But then markets are on the upmove. Do you have a risk management strategy in case the markets start their downward journey?
Also, how do you select stocks on which you will write the calls?
What about considering the possibility of early exercise?
 

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