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.
Mr. X owns Reliance Shares and expects the price to rise in the near future. Mr. X is entitled to receive dividends for the shares he hold in cash market. Covered Call Strategy involves selling of OTM Call Option of the same underlying asset. The OTM Call Option Strike Price will generally be the price, where Mr. X will look to get out o ..
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.)
Bullish
When to use?
This strategy work when an investor expect the underlying instrument move in upward direction.
An investor has a short term neutral view on the asset and for this reason holds the asset long and has a short position to generate income.
Action
Buying Call option
(Buy Underlying) (Sell OTM Call Option)
Breakeven Point
Strike price + Premium
Purchase Price of Underlying- Premium Received
LONG CALL Vs COVERED CALL - Risk & Reward
LONG CALL
COVERED CALL
Maximum Profit Scenario
Underlying Asset close above from the strike price on expiry.
[Call Strike Price - Stock Price Paid] + Premium Received
Maximum Loss Scenario
Premium Paid
Purchase Price of Underlying - Price of Underlying) + Premium Received
Risk
Limited
Unlimited
Reward
Unlimited
Limited
LONG CALL Vs COVERED CALL - Strategy Pros & Cons
LONG CALL
COVERED CALL
Similar Strategies
Protective Put
Bull 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.
• Unlimited risk, limited reward. • Inability to earn interest on the proceed used to buy the underlying stock.
Advantages
• Less investment, more profit. • Unlimited profit with limited risk. • High leverage than simply owning the stock.
• Profit from option premium, rise in the underlying stock and dividends on the stock. • Allows you to generate income from your holding. • Profit when underlying stock price rise, move sideways or marginal fall.
