Monday, October 11, 2010

COVERED CALL: Options Trading Strategies

Covered Call (BUY STOCK + SELL CALL)
If you own shares in a company which you feel may rise but not much in the near term. You would still like to earn an income from the shares. The covered call is a strategy in which an investor sells a Call option on a stock he owns. The Call Option sold is usually an OTM Call. Here I will receive a premium for selling call option. I will sell call at a price for which I will be comfortable in selling the stock. So if market rises to that level I will get the desired money of my stock as well as premium also. If market falls, I will earn the premium.
Market Scenario: Neutral to moderately Bullish

Risk: if stock is moving down you will lose your stock value but you will gain the premium as buyer is not going to buy. If stock is moving up beyond the strike, you have to give up all the gain.

Reward: Strike + Premium

BEP: Stock Price Paid - Premium
EXAMPLE:
Entry:

STOCK
5100
    
                

STRIKE
PREMIUM
SELL CALL
5200
50
BEP = 5100 - 50 = 5050


On Exit if:


SPOT
STOCK
CALL PAY-OFF
STRATEGY PAY-OFF
4800
-300
50
-250
4900
-200
50
-150
5000
-100
50
-50
5050
-50
50
0
5100
0
50
50
5200
100
50
150
5300
100
50
150
5400
100
50
150
5500
100
50
150


Strategy Pay-Off

BULL CALL SPREAD : Options Trading Strategies

Bull Call Spread (BUY CALL + SELL CALL)

Establishing a bull call spread involves the purchase of a call option on a particular underlying stock, while simultaneously writing a call option on the same underlying stock with the same expiration month, at a higher strike price. Both the buy and the sell sides of this spread are opening transactions, and are always the same number of contracts. This spread is sometimes more broadly categorized as a "vertical spread". The bull call spread, as any spread, can be executed as a "unit" in one single transaction, not as separate buy and sell transactions.

Market Scenario: Moderately Bullish to Bullish

Risk: Limited

Reward: Limited

BEP: Strike Price of Purchased Call + Net Debit Paid

EXAMPLE:
Entry:

SPOT

5000

STRIKE

PREMIUM

BUY CALL

5100

60

SELL CALL

5200

30


BEP = 5100 +30 = 5130

On Exit if:

SPOT

BUY CALL PAY-OFF

SELL CALL PAY-OFF

STRATEGY PAY-OFF

4800

-60

30

-30

4900

-60

30

-30

5000

-60

30

-30

5100

-60

30

-30

5130

-30

30

0

5200

40

30

70

5300

140

-70

70

5400

240

-170

70

5500

340

-270

70

Strategy Pay-Off