If the trader is bearish on market and bullish in volatility, he will implement this strategy. However the trader can be neutral in nature i.e. indifferent if the market moves in either of the direction, this strategy will make profits, but uptrend will give a capped income than downtrend which will give unlimited returns.
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 ..
PUT BACKSPREAD Vs COVERED CALL - When & How to use ?
PUT BACKSPREAD
COVERED CALL
Market View
Bearish
Bullish
When to use?
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
(Buy Underlying) (Sell OTM Call Option)
Breakeven Point
Purchase Price of Underlying- Premium Received
PUT BACKSPREAD Vs COVERED CALL - Risk & Reward
PUT BACKSPREAD
COVERED CALL
Maximum Profit Scenario
[Call Strike Price - Stock Price Paid] + Premium Received
Maximum Loss Scenario
Purchase Price of Underlying - Price of Underlying) + Premium Received
Risk
Limited
Unlimited
Reward
Unlimited
Limited
PUT BACKSPREAD Vs COVERED CALL - Strategy Pros & Cons
PUT BACKSPREAD
COVERED CALL
Similar Strategies
Bull Call Spread
Disadvantage
• Unlimited risk, limited reward. • Inability to earn interest on the proceed used to buy the underlying stock.
Advantages
• 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.
