Everybody,
I would like to pen down my covered call writing strategy. As many would agree, this is one of the safest option strategies to implement - if you know what you are doing. I expect a return of around 15% per annum via premium income and 15% CAGR per annum via capital appreciation - net net a return of 30% CAGR over a long term. Yes - 30% CAGR is achievable via "buy and hold" strategy on fundamentally strong midcap stocks too. But my covered call strategy gives me the same returns with lower volatility and *almost* guaranteed monthly income.
Minimum investment required for this strategy is around Rs. 5 Lacs. Ideally, ANOTHER Rs. 5 Lacs should be invested in fundamentally strong stocks (I'll explain this part later).
This tutorial will have multiple sections -
Part I - How to pick the right stocks for the strategy
You select the wrong stock for the strategy and your returns go down the drain. So I'll be spending more time explaining how I select stocks for writing covered calls.
Part II - Which strike price to write call
We will only be writing far out of money calls - irrespective of the outlook on the stock or the market conditions. The idea is to increase the chances of keeping the premium, and not disturb the stock holdings as far as possible.
Part III - What to do with stock price falls or goes up drastically within a month.
Basically, we will be rolling up the calls when the stock price goes up and rolling down the calls when the stock price goes down.