SOME STRATEGIES FOR WRITING COVERED CALLS
This is the strategy that works best in India since options of fundamentally strong stocks continue to have some time premium left till the last day. You should write at-the-money calls since these give the maximum premium inflow. It is critical, however, that once covered call writing is accepted as a strategy, nse india, traders should write calls on an ongoing basis. On the last Thursday of every month, it should be a ritual to write fresh calls for the next month. Traders and Investors should look to invest their funds every month in order to get consistent benefits of call writing.
Generally speaking, options written in big stocks do not get exercised and it is possible to either square up the transaction on the last day, or let the option expire and sell the stock as well towards the close in order to initiate new positions. In case the same stock still looks good, traders can sell fresh calls while letting the old ones expire. This might entail some cash outflow if the stock market tips stock had moved up very sharply in the previous month, the call sold deep in-the-money, and the fresh call is written for a lower premium inflow. The additional premium paid on the expensive call is captured as the intrinsic value in the stock, which remains notional if the stock is held. Again the approach is different for traders who are using covered call as a strategy and for those who have the stock position and just want some extra income online trading tips.
In some cases the calls you write might be exercised by the buyer. Typically, this happens when the price of the stock rises very sharply certificate in technical. And this can happen since individual stocks have American Options which can be exercised at any time during the month.
Should this happen, the trader needs to review the entire situation and decide whether the stock could be expected to rise much further or if the rise was a one-off-move. This is never easy to determine. Nevertheless, some points such as volumes, breakout after a narrow range, or from a bullish pattern, would be the likely signals to look at.
In such cases traders should go on writing at-the-money calls as soon as a previous call is exercised against them. They can also write one or two strikes further from the at-the-money call if the stock looks bullish and technical analysis training is expected to rise further. You should not be worried about the exercise against you because you have captured the entire gain in the intrinsic value of the stock in any case. Fresh call writing needs to be looked at asa fresh situation. Sometimes writing a call on another stock which is range bound might be more useful.
If the stock breaks down all its supports you should close your entire covered call positions.. As mentioned earlier a covered call needs to have an ultimate stop loss should the stock starts tanking. Despite the best technical analysis, sometimes a stock starts failing its supports and goes into a down trend. At that point it is critical that the entire covered call position in the stock V be closed at a stop loss determined by a strong support. You might use the idea of closing out a part of the position driven by the fact that your outlook on a given stock might have changed. You now have a more bullish view on the stock. This might tempt you to buy back a share tips portion of your sold calls, maybe at a higher rate, and aim for some capital appreciation too. You should not think like this because once you have decided to write a call, you should be clear that you are giving up the upsides. Changing one’s objective midway only leads to higher transaction costs and sometimes the gain envisaged does not mater ialise.
For a large mutual fund or very high net worth investors, it makes sense to write index options to enhance returns as w’ell as hedge in times of uncertainty or consolidation. For smaller traders and investors, selling index options is a good way of playing in the index futures market. Trading naked index futures is generally pretty tough even for seasoned traders. For a retail trader, on the other hand it is often easier to judge if the index will hold a particular level.
So by going long in the index futures and selling an at-the-money index call option, the retail trader gets a larger stop loss in terms of breakdown. By doing so, he gets into the advantageous situation of the option seller, rather than being the option buyer and getting wrong end of the stick. Indian Markets, and for that matter al markets, go sideways for long periods of time, so buying futures and selling at-the-money call options technical analysis can be a profitable option, still, as discussed earlier, it is critical to apply a stop loss in all futures and stock positions. Generally in bullish markets, at-the-money Nifty index call options sometimes sell for ever. RS.50, so the trader immediately gets Rs.50 in his account as profit and as stop loss, in the case of sensex this would be 150 points. Unless the trader get the trend wrong, a 50 point stop loss is generally enough.
This involves writing calls on a part of your stock holding thereby fine tuning your portfolio to achieve fixed as well as variable returns. Writing covered calls on all of your stock holding is a good idea in the Indian Scenario. In twenty trading sessions, it is difficult for most stocks to consistently beat the covered call premium.
Mixed writing is done by writing calls, at different strike prices. Again therd could be lot size problems here. There is another way of fine tuning returns but in the Indian scenario not very viable nor profitable, mainly because
1. You end up having a large position in single stock
2. Stock movement might not be according to expectation unless the stock is trending.
Ratio writing means writing higher calls in the ration of 1:2, or more, to the stock held. But it is not advisable to write more than 1:3 because unexpected things happen in the market. This strategy is also used where you have a shortened month and the call premiums are high. It is critical to understand the breakeven in this transaction on both sides.
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