covered calls

1. buy one lot of shares. (this is your inventory )

2. sell a call option for a higher (OTM ) strike price (aim for atleast 5%)

in case the call option ends 

-  OTM , you get premium.

- ITM, you get the premium and also the profit between what you bought and the strike.

good. now go to step 1

well and good, but not so easy. simple . not easy.

this right here is your business model. there are some risks, but you can keep selling OTM call options almost inifinitely (one every month) 

not easy #1 : outlay is around 5-10 lakhs for one lot of shares to be held in inventory

not easy #2 : margin required is around 1-10L depending on underlying price. this doubles the working capital requirement while keeping return rates fixed, essentially halving the return

notes 1: every EOM, options positions close,  and depending on overall trend (bullish for eg), there is the reverse (selling), moving the index contrarily. This creates opportunities and problems.

eg - if market has been bullish, there is selling near EOM, meaning things are cheaper all-else-constant.

I saw this in the nifty option. for asian paints, there were occasional surges, so a sell order at a higher price would've gone through

scenario # : what happens if you sell two OTM options covered by the same lot of inventory ? ans you get in the shorts if the price zooms up leaving you on the hook for one delivery at market rates

now in case 

1. the underlying's price ends up above your buy, you can sell it right away and book a profit, or repeat step 2 above

2. the underlying's price ends up below what you paid for it ...... in case the underlying's price ends up below what you paid for it ...... you switch from speculator to investor, mark this trade for long hold, then beg around for fresh capital and repeat from the beginning you just go directly to step 2 skipping step 1.

 

his won't work on nifty because it's a cash not a delivery settlement

there's some uncertainty that we might exploit between this month and next month prices