option trading strategies covered call

priya Follow Priya is a Breed Securities industry Analyst and professional blogger. She is the Founder and Author of WWW.analystcalls.in

Selection strategies – Covered call, Covered put

November 14, 2010 2 Fukkianese read

Covered shout out and Ariled put are some unmatched of the better option strategies for those who trade Fdanamp;O section. These strategies are used for reducing the loss if trade goes against our matter-of-course slue. Fdanampere;O is a risky segment which always needs protection for the monger if something goes wrong unexpectedly in the stock. These strategies are very good for positional traders as well as day traders(if the implicit stock is a market mover and shows potential movement in trend).

So what are these covered margin call and ariled order? It is very sluttish to understand. This is non a rocket science..fair-and-square lyrate strategydannbsp; that needs to embody applied with some trait rules which you Crataegus laevigata study them as conditions to apply this scheme. They can buoy be applied for both stock as well as forefinger futures and options.

Covered call – Take long in proximo(buy) and screen that with shorting the nearest call.

Wrapped put – Charter shortstop in future and cover that with shorting the nearest put option.

Have me excuse how this spattered call works. If we expect the stock to lift and then we subscribe long lay in stock future and to protect this we need to short(write) the nighest call. So, if the stock moves in the lead and meets the fair game, we bequeath be in profit in FUT. At the same time, we shorted call and when the stock moves up the call premium also increases. When the stock meets the target we need to cover the long position in future and cover the call as well.dannbsp; Since we are shorting either At-the-money or the nearest Out-the-money Call choice, the grade of gain in premium bequeath obviously be less than the rate at which the parentage future moves. The net that we get in future bequeath be reduced to the extent to the premium we need to cover in the shorting of call and the difference in them is our lucre earned.

Good example: Take JPASSOC which was 124 finale week and the 130ca option premium stands at 3.2. If we expect the stock to move risen then we proceeds long-run attitude in future and short 130ca. When the stock moved 134 then the premium went 8 from 3.2. and so, we earned 10rs in Fut and missed 4.8rs in shorting. Difference is 10-4.8=5.2rs is our profit. Lot is 2k..means 5.2*2k = Rs.10400.

Assume, the stock goes down from 124 to 121. Then assume agiotage in 130ca goes from 3.2 to 1.5. Way, we get 3points loss in FUT but 1.7 points profit in option. So, overall 1.3 is red but not 3. Thusly, the advantage of this strategy is that it protects from heavy loss in future. One more merit of this concept is, assume if the stock doesn't move much and stays at 124 money box expiry. Simply 130ca goes from 3.2 to 0. Substance at that place is no profit in FUT but we bring fort 3.2rs in choice..which is just about Rs. 6400. Put differently, if the stock is purely in sideways, this strategy works at its best, apart from purely trendy commercialise.

Same concept applies vice-versa to covered frame option scheme only in the opposite direction.

These are the following conditions which need to be taken into condition earlier applying these strategies:

1. The stock needs to b a market mover. At the same time IT works at its best when the stock is purely sidewise.

2. Information technology should have best liquidity in options. Otherwise due to to a lesser extent volume agiotage will have much varied bid and offer rates.

3. Choose either ATM or OTM options.

4. Both FUT and shorting the option should be taken and snowy at the same time. If short not covered then information technology leave be a naked short which is highly risky and deprivation is unlimited. So disclaimer of risk in shorting naked options will e'er comprise there.

Here are the few Nifty stocks which are market movers with good liquid options. SBI, Reliance, Tisco, JPAsso, Renuka, Chambal Fert, IFCI, ICICI Bank. Last just non the least in index category, Nifty Future 🙂

Happy Trading.
Priya.