- [Instructor] Welcome to the Options Trading Strategy video series. So in this particular video, we will be covering about covered call writing strategy. So what I'll be doing is, I'll take you through brief overview of covered call writing, then I'll be taking you through some basics of covered call writing strategy with an example. I'll also be showing you two ways to execute this strategy. Number one, using covered call writing to generate consistent returns or existing investments. And number two, how to anticipate a bottom in the market with minimum risk.
I'll also be looking into instrument selection, and which conditions are suitable for executing this strategy. Also in the end, I'll be showing you how to manage risk in this particular strategy. So let's get started. (dramatic music) - [Narrator] In this channel, we talked about trading, investing, and market analysis to help you become a better investor and trader. So if you are new here, consider subscribing https://casinoslots-sa.co.za/casino-cruise. - [Instructor] So the first part that I would like to cover is covered call writing basics. Now in the previous video, you've have seen how selling options can be risky especially if you don't understand the underlying risk. Covered call riding essentially enables you to write options at a substantially lower risk. in this strategy, you buy a stock, and then you sell equivalent amount of calls at strike price higher than the buying price of the stock. Now this part will be more clear when we get into specific examples. But for now, you need to understand that this strategy is typically used for generating income in market. But I'll also be showing you there how you can use this particular strategy to bottom fish in market with extremely limited risk. Now this was traditionally used only with stocks that is a combination of equities and options, but you can also take up combination of futures and options to execute this strategy successfully. So, I'll just begin with the basics now. So covered called writing is basically a neutral strategy where a trader expects the stock or essentially the price of the asset to remain in a range. Now this is mainly because a trader typically writes, calls in this strategy, and price moves within the range, he allows time to work in his favor. Due to time decay, a premium would be eroded, and that is where he stands to benefit. This particular strategy can also be used as a hedge against a long position in an index or a stock futures. So if you're very bullish, you should just be holding a normal stock or index futures, don't get into this covered call strategy because your upside would be limited. And in case you're very bearish, you should just avoid holding the stock as the premium received, that is the net premium received when you sell the call option that is higher strike call option that would not offset the losses that you are sustained from a falling stock or index. Again, all this particular technical details of this slide would be clear in the upcoming slides. So I'll directly move to examples and risk profile of this particular strategy. Now let me take a hypothetical example here where I'll be taking an example of stock ABC which is trading at rupees 60. So in order to create a covered call strategy, what we will do is we need to buy the stock first, this is the first step. So let's assume we have bought 100 shares of ABC at rupees 60, the second step is now to sell calls at higher strike prices. Now we will now sell us call of 65 strike price at premium of rupees three. So let me just remind this for you, stock purchase price is rupees 60, call option written is at 65 strike price the premium received for the same is rupees three.
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