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