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25/11/2020

How should you use the covered call strategy?
Choosing between the ideal strikes involves a trade-off between priorities. An investor can select higher
out-the-money strike price and preserve some more upside potential. However, more out-the-money
would generate less premium income, which means that there would be a smaller downside protection
in case of stock decline. The expiration month reflects the time horizon of his market view.
Strategy
Delivery Holdings in a stock & Sell call option
Long ITC & Short ITC 230 CE
Expiry Date 31st Dec 2020
Market Outlook Moderately bullish
Breakeven(Rs.) at expiry Stock price paid-premium received
Maximum Risk Stock price paid-call premium
Reward Limited
Margin required No – If one can pledge the stock holding
Let’s try to understand the Strategy:
ITC Rs.195
Strike price Rs.230
Premium Received (per share) Rs.1
BEP (strike Price - Premium paid) Rs.194
Lot size (in units) 3200
Let us consider the following scenario: Mr. A has a delivery holding of 3,200 shares of ITC Ltd. Mr A sells
a 15% out of the money call option with a strike price of Rs.230 for Rs.1. The upside profit potential is
limited to the premium received from the call option sold plus the difference between the current market
price of stock at the time of option writing and its strike price.
In the above example, if stock price surges above the 231 level, then the maximum profit would be
calculated as:(195-230 +1)*3200 = (36*3200) = Rs. 115,200. If the stock price stays at or below Rs. 230,
the call option will not get exercised and Mr. A can retain the premium of Rs. 3200 per lot, which is an
extra income. Mr. A can do the similar strategy every month to generate addition income on his stock
ITC Covered Call Strategy
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