Profit Cover

Step One

Covered writing allows you to sell the shares at a predetermined price and enjoy the premium received by selling call options

Covered writing is a very popular option strategy used in developed countries. It involves buying shares and selling call options against it simultaneously.

Being a seller of call options you are obligated to sell the underlying shares at the strike price. So you predetermine the selling price of your shares by selling call options at a particular strike price which is above the purchase price. Over and above that, you enjoy the premium through selling the calls. For example, currently Satyam is trading at Rs 275 and is moving up.

Now, if you want to buy the stock and sell the same at say Rs 300 at the end of December, you can opt for a covered writing position. You can do so by simply buying Satyam at the current price and selling equivalent December call options with a strike price of Rs 300.

If the price of Satyam appreciates beyond the strike price your option will be exercised and you sell your holdings at the strike price of Rs 300. So you enjoy the call premium and forgo the profit equivalent to the difference between the stock price and the strike price.

If Satyam doesn't appreciate beyond the strike price, your call will expire un-exercised and you enjoy the premium. But there are some risks associated with the strategy. If the stock falls, you must be prepared to hold it for long. So, for covered writing it is always advisable to go with stocks that are fundamentally strong and worth holding for long periods.

In case the stock rising much over your expectations. Don