High return Covered Call Strategy

#1
Covered Call strategy can be very profitable if used in the right way. I have read several articles undermining the potential of Covered Calls by focusing on the aspect that the upside is capped by this strategy. For course that is right, but the authors fail to recognize the fact that Covered Call strategy can provide very high probability of success with high returns. What really matters for any investor is high ROI. Another overlooked aspect about this strategy is that most authors do not advise to sell ITM (In the Money) Covered Calls. Mostly they will advise to sell OTM (Out of Money) strike Calls so that a portion of the profit from the share appreciation till the OTM strike price can be gained + the call premium can be earned if the share price moves beyond the strike price. However, in this strategy, the protection on downside is limited as the Call premium will move down at a much slower pace compared to the reduction in price of shares. My advise is to choose an ITM strike to sell Calls so that the delta of the Call is high. This will help the call premium to go down at a faster rate (about 60% to 70%) of the speed of share price drop. Using a lower strike also results into a high probability of success as the trader earns the premium whether price appreciates, moves sideways or goes down upto the strike price on or before the expiry date
 
#2
Covered Call strategy can be very profitable if used in the right way. I have read several articles undermining the potential of Covered Calls by focusing on the aspect that the upside is capped by this strategy. For course that is right, but the authors fail to recognize the fact that Covered Call strategy can provide very high probability of success with high returns. What really matters for any investor is high ROI. Another overlooked aspect about this strategy is that most authors do not advise to sell ITM (In the Money) Covered Calls. Mostly they will advise to sell OTM (Out of Money) strike Calls so that a portion of the profit from the share appreciation till the OTM strike price can be gained + the call premium can be earned if the share price moves beyond the strike price. However, in this strategy, the protection on downside is limited as the Call premium will move down at a much slower pace compared to the reduction in price of shares. My advise is to choose an ITM strike to sell Calls so that the delta of the Call is high. This will help the call premium to go down at a faster rate (about 60% to 70%) of the speed of share price drop. Using a lower strike also results into a high probability of success as the trader earns the premium whether price appreciates, moves sideways or goes down upto the strike price on or before the expiry date
Hi , thanks for the thread. I read some of your posts around here.

Can you please explain with an example ? Like how the itm option is better then otm ?

As if the share price increases the delta of itm is high as well which may lead to break even .. as if it falls - the premium won't be much plus we have to cover it at expiry if still itm. And may have liquidity issue..

Thanks
 
#3
Covered Call strategy can be very profitable if used in the right way. I have read several articles undermining the potential of Covered Calls by focusing on the aspect that the upside is capped by this strategy. For course that is right, but the authors fail to recognize the fact that Covered Call strategy can provide very high probability of success with high returns. What really matters for any investor is high ROI. Another overlooked aspect about this strategy is that most authors do not advise to sell ITM (In the Money) Covered Calls. Mostly they will advise to sell OTM (Out of Money) strike Calls so that a portion of the profit from the share appreciation till the OTM strike price can be gained + the call premium can be earned if the share price moves beyond the strike price. However, in this strategy, the protection on downside is limited as the Call premium will move down at a much slower pace compared to the reduction in price of shares. My advise is to choose an ITM strike to sell Calls so that the delta of the Call is high. This will help the call premium to go down at a faster rate (about 60% to 70%) of the speed of share price drop. Using a lower strike also results into a high probability of success as the trader earns the premium whether price appreciates, moves sideways or goes down upto the strike price on or before the expiry date
You are right,
But in practical we end up in good profit only when the stock moves up when we do covered call strategy,
For an investor on the high beta stock like yesbank, its better to go with stock instead of future trading, and we can slowly increase the stock qty as soon as we collect the premium from CE before hedging it with CE rollover or higher strike CE, key thing is to switch the CE strike to be safe and collect more premium till the 3rd week of everymonth, and by the last week one can prefer to sell Oslightly OTM strike instead of ITM,
Few other good stocks are hind Unilever, ITC, Axis, considering the stock sideways characteristics to gain on sideways market
 
#4
You are right,
But in practical we end up in good profit only when the stock moves up when we do covered call strategy,
For an investor on the high beta stock like yesbank, its better to go with stock instead of future trading, and we can slowly increase the stock qty as soon as we collect the premium from CE before hedging it with CE rollover or higher strike CE, key thing is to switch the CE strike to be safe and collect more premium till the 3rd week of everymonth, and by the last week one can prefer to sell Oslightly OTM strike instead of ITM,
Few other good stocks are hind Unilever, ITC, Axis, considering the stock sideways characteristics to gain on sideways market
I find HDFC Bank also a good counter for covered call strategy....it is a steady stock which one would not mind holding for long term...

Smart_trade
 
Last edited:

SarangSood

Well-Known Member
#5
Hi , thanks for the thread. I read some of your posts around here.

Can you please explain with an example ? Like how the itm option is better then otm ?

As if the share price increases the delta of itm is high as well which may lead to break even .. as if it falls - the premium won't be much plus we have to cover it at expiry if still itm. And may have liquidity issue..

Thanks
ITM is always better or i should say safer in such strategy. For example if you sell a .8 delta cal you will have a good downside protection and sure shot profit upside or sideways as whatever premium you will pocket will decay sooner or later. If you sell 2 cals of .4 delta you will have reasonable protection in the downside but now you will be exposed to the upside. If the stock moves 3-5% up the cals which were OTM will become ITM. So the .4 delta otm cals can become .7 delta itm cals whose sum is now 1.4 delta. So you will incur a loss of .4 delta in such situation upwards. So you will have to shift your position which also comes at a cost. But in such situation your itm cal would have given a decent profit.

The downside is as you mentioned the liquidity. Also you pocket lesser premium if you are aiming for an aggressive ROI.
 

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