This is one of the basic strategies as it involves entering into one position i.e. buying the Call Option only. Any investor who buys the Call Option will be bullish in nature and would be expecting the market to give decent returns in the near future.
This strategy is exactly opposite to Covered Call Strategy. Here the investor is neutral or moderately bearish in nature and wants to take advantage of the price fall in the near future. The trader will short one lot of stock future. Now the trader will short ATM Put Option, the option strike price will be his exit price. If the prices rally above the strike price, the ..
Bullish (Any investor who buys the Call Option will be bullish in nature and would be expecting the market to give decent returns in the near future.)
Bearish
When to use?
This strategy work when an investor expect the underlying instrument move in upward direction.
The Covered Put works well when the market is moderately Bearish.
Action
Buying Call option
Sell Underlying Sell OTM Put Option
Breakeven Point
Strike price + Premium
Futures Price + Premium Received
LONG CALL Vs COVERED PUT - Risk & Reward
LONG CALL
COVERED PUT
Maximum Profit Scenario
Underlying Asset close above from the strike price on expiry.
The profit happens when the price of the underlying moves above strike price of Short Put.
Maximum Loss Scenario
Premium Paid
Price of Underlying - Sale Price of Underlying - Premium Received
Risk
Limited
Unlimited
Reward
Unlimited
Limited
LONG CALL Vs COVERED PUT - Strategy Pros & Cons
LONG CALL
COVERED PUT
Similar Strategies
Protective Put
Bear Put Spread, Bear Call Spread
Disadvantage
• In this strategy, there is not protection against the underlying stock falling in value. • 100% loss if the strike price, expiration dates or underlying stocks are badly chosen.
• Limited profit, unlimited risk. • Trader should have enough experience before using this strategy.
Advantages
• Less investment, more profit. • Unlimited profit with limited risk. • High leverage than simply owning the stock.
• Investors can book profit when underlying stock price drop, move sideways or rises by a small amount. • Able to generate monthly income. • Able to generate profit from fall in prices or mild increase in the prices.
