We have request from Sudhin for recommending a covered call position for Him to recoup his losses.. Let me try and build one for him....

Some Basic Assumptions

1. Sudhin Has 100 (one lot) of Infy shares

2. He is in position to pledge his holding and take a traing limit against this (like the one given by ICICI Direct / Kotak Securities and othe brokers...

3. This strategy is being discussed for education purpose... When i look at my charts, i get feling that Infosys may bounce within short time and this may not be correct time to write calls

Time 12.05 Infy Spot at 1828

Sudhin Should sell 2 lots of Infy Sept Calls of 1890 Strike price. Total limit required for selling these calls would be approx Rs 100000, which will come from limit released by his holding..

The resultant Payoff diagram may look like the one in the chart..

Sudhin will get to pocket Rs 3380 as premium as long as Infy does not close above 1890. He also gets to keep whatever stock appreciation that happens. Beyond 1890 spot, the call premium will start eating into the gain he makes on his portfolio holding.

He can still keep holding position till Nifty spot of 1980, beyond which he will start losing Money (seems distinct possibility in current month)So the call premium will help him recover approx 1.75% of his loss at CMP in 15 days.. (not a bad deal)..

Please give me your comments

Covered Calls on Diversified Portfolio

I was asked in one forum today about writing covered calls on diversified portfolio. I gave a thought to it but it appears that this will be difficult.

Theoretically, it should be possible to write options on nifty portfolio if you have some or all nifty stocks. The ideal way is you build a portfolio taking at least 80% weight age Nifty stocks and then write options on nifty. The other way is to take position in Nifty Future and hedge it by selling calls. However, there you need to be ready with margin calls money in case future drops dramatically.

In fact some point next year I will be doing that for a portfolio size of approx 10 lakhs. However, we need to continuously monitor nifty weight age and make some adjustments to stock positions.

However, there is bigger advantage in selecting individual stocks for covered call writing. Stocks tend to have higher volatility compared to Index, so you get better premium. Like in case of TTML, I was able to write option at strike price of 40 when stock was at 32. That is 25% higher than CMP. And to top it further, I got nearly 2% of stock price (65 paise) as premium. This gives us a lot of safety margin.

In fact many stocks which are active option stocks and are in sub 50 Rs price and total lot value of less than 4,00,000 Rs are good candidates for Covered call writing. However, one must be willing to hold these stocks for long period in case the market gets in downturn and hence the stock needs to be fundamentally a promising one.

I will do some calculations about Covered call writing on nifty portfolio over wek end and then post it here.

TTML Breakout today

TTML Broke out today....

In the process, sold call of strike price of 40 rs started rising. Hence i decided during market hours to square off my position by buying back sold calls at Rs 0.45, effectively booking approximately 4000 Rs profit on calls sold.

My delivery position of TTML is also in Profit of nearly 12000 Rs. I will continue to hold and write some more calls closer to series expiry.



Abhijit

My Current Trade

I have initiated following trade using Covered call strategy

This trade was initiated on 30 August

I chose TTML as stock for covered call writing for following reasons:

1. I want to own this stock, i am convinced about longterm prospects of TTML & telecom industry

2. TTML has high level of Volatility, giving good premium

3. Options are available for fairly long range strikes.

I Have used a variation of covered call which is sometimes referred as "ratio write"

The position set is as below:

1. Bought 5225 (half lot) of TTML shares for delivery @ Rs 31.95

2. Sold 2 lots of TTML options of 40 Rs Strike @ Rs 0.65


The chart below shows TTML position pay off


We will be comfortable as long as TTML closes below 43.50 by month end. If it remains Below 40, we will pocket entire 13500 Rs premium collected. We will write calls again next month.

Total Money invested in buying calls is approx Rs 168000 while margin blocked for writing calls (2 Lots) is Rs 140000, which has been provided by the limit taken against TTML stock in the portfolio.

This position was initiated on 30th August.

As on today, TTML stock is at Rs 32.50 and the options sold were at 0.30. Hence overall position is profitable.

Keep watching

Abhijit

Covered Call Writing - Basics

One of the conservative ways to write options is to do covered call writing. This is a way to generate additional income for your stock portfolio. Covered call writing refers to writing calls against the stocks that you own.

Here, there is no risk from writing the call. The obligation of writing the call is offset by owning the stock. For example, if you own 100 shares of Pfizer priced at 40 and write the Pfizer Jan 45 call at 2, you receive $200 to your account but are obligated if Pfizer is above 45 and you are exercised to deliver the stock at 45.

Covered call writing is ideal when you have a target where you wish to sell the stock. Then you are getting paid as you wait for the stock to hit your target. In our Pfizer example, if your target for Pfizer was 45, you receive $200 as you wait for the stock to exceed 45. If the stock does not get to 45, you can write an-other option with a strike price of 45 and collect more premium as you wait. If the stock is called away at 45, you receive 45+2 or $47 a share.

When you don’t want to sell the stock, follow the guidelines that we presented in the previous chapters. Only write an out-of-the- money option with a high probability of expiring, set a stop-loss and buy back the option if the stop is hit. Then you can roll into a new option writing position, further out-of-the-money if you desire.

Your danger here is that the stock could gap up over the strike price, and you could take a bath buying back those options. Always close out all positions when most of the premium vanishes. Avoid covered call writing on a stock in a strong up-trend unless you believe it is making a top, and then it may be wiser to sell the stock than to write calls on the stock.