Covered call option trading strategy is a strategy used as a rental income, where a profit of 2 to 3% can be earned on every month. This strategy is used by people who buy a stock with a large amount and sell call options on that stock to trade the position safely. Due to which the stock does not increase, then money is earned by selling its call option. If Stock is a buy or Nifty, Bank Nifty bees (ETF), Even if you have bought a fund (NIFTY or BANKNIFTY ETF FUND), but there is a decline in the market, you can still earn profits by using this strategy. Option trading strategy is called Covered call option trading strategy.
Let us understand in simple language.
For example, you have bought Reliance shares whose quantity is large, say 700 to 800 shares, due to which our risk will also be high. To protect against this risk, if there is a decline in the market or there is no increase in the shares of Reliance, then profit can be made by short selling the call option of Reliance itself. For this, first of all there should be future and option in the stock, after that purchase in that stock at least that much. The quantity should be equal to the amount of options within one lot. So here the lot size in the future and option of Reliance is 250 and if we have bought 500 shares, then we can sell 2 lots in the call option at the money. If Reliance does not go up from here or falls slightly, then the price of “at the money” call option will go to zero at expiry and we will get profit from there.
For this you have to remember some things.
1.The stock we are buying should have future and option.
2. The stock is not rising or is in decline or there is not much movement.
3. To maintain profit even if the stock rises, selling should be done through "at the money" option or “out of the money” option or “at the money” call option.
4. The purchase of shares should be more than or equal the lot size of the future and option
CALCULATION
As of today's date, 26th December 2023 (for your information only)
Reliance share price ₹2665
Total share purchased 500
Total investment= 2665×500= ₹1332500
If there is a decline in the market or there is no increase in the shares of Reliance, then I will sell “at the money” call option for the month of next January month Expiry Call option in the same lot size.
I will sell RELIANCE 2660 Call option, the price of which is ₹ 71, the lot size of Reliance is 250 shares, so here the sale will be done in 2 lots.
₹71×250×2=₹35500
Situation-1 If the market does not go up and the Reliance stock is trading below ₹2670, then the price of the first “at the money” call option will go down significantly before expiry. If it trades below ₹2670 even till expiry, then we will make a profit of ₹35500 on two lots.
Situation-2 If there is a slight upside in the market and Reliance stock goes above 2670, then there will be a slight loss in the call option. But we have bought Reliance shares, so from there we will get profit and will continue to cover our losses. Even if Reliance shares close at Rs 2750 before expiry, we will still get profit. Let's take a look.
Reliance share quantity 500
Reliance share purchase price 2665
Reliance share price increased to 2700
Total profit from share=2700-2665=35×250×2= ₹17500
Selling price of Reliance 2670 call option 71 with 2 lot
Reliance increased price 2700
Residual Call Option Premium 2700-2670 = 30 with 2 Lots
Total profit=30-71=41 with 2 lots=41×250×2= ₹20500 profit
So, in this way, if the share price of Reliance goes up even a little and closes, before the expiry, we will buy only the shares of Reliance. ₹17500 Earn profit as well as premium by selling at the money call option by taking advantage of (time decay) will earn profit of ₹20500.
Situation-3 If the market becomes more bullish and the share price of Reliance also increases where it reaches Rs 2800 before expiry, still we will get profit only and there will be no loss of any kind here. Because we have also bought in Reliance shares which will completely cover the loss, so let us understand this also.
Reliance share quantity 500
Reliance share bought price 500
Reliance share price increased by 2800
Total profit from share=2800-2665=135×250×2= ₹67500
Selling price of Reliance 2670 call option 71 with 2 lot
Reliance increased price by 2800
Residual call option premium 2800-2665 = 135 with 2 lots
Total profit =71-135= -64 with 2Lots = -64×250×2= -₹32000
As mentioned in the calculation above, Reliance gained momentum and closed near 2800. Due to which the call option also increased and the call option of ₹71 will reach ₹135. in which We will have a loss of -₹32000 on two lots, but we will also get Reliance share of ₹500. buying It has been kept, which will reach ₹2665 to ₹2800. In which total profit will be ₹67500 and from this profit -₹32000 negative, even if I give it, in the end there will be a profit of ₹67500 - ₹32000 ₹35500 only.
How much capital will be required to build it?
To create a Covered call option trading strategy, you will first have to purchase a stock equal to the lot size of the future and option of that stock. In which at least 6 to 7 lakhs will be required and to sell one lot option, 1 to 2 lakhs will be required. The price of all stocks is different, due to which their lot size will also be different, due to which it is not possible to tell the fixed capital.