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Thursday, September 10, 2020

Covered Call Strategy For Long Stock Portfolios

تم إعداد هذا المنشور من قبل سنشري للاستشارات

Covered Call Strategy For Long Stock Portfolios
Covered Call Strategy For Long Stock Portfolios

Description

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Covered Call is one of the strategies wherein one may potentially make additional returns on long stocks portfolio.
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It involves purchase of stock and obtaining its delivery while simultaneously selling a Call Option on the same stock.

Let’s take the example of Walt Disney illustrated in the table below:

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If the stock price increases above the strike price levels, the profits would be restricted. This happens because the stocks available in the Portfolio would be delivered if the price of the Walt Disney rises above the strike rate.
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If the stock price remains at the same level, this strategy allows you to make some gains.
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If the stock price of Walt Disney falls, your losses would be reduced due to the premium received.
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Call Option can be sold against the long shares of Walt Disney only if the shares are available in the Portfolio.
Make additional coupon on your long portfolio
Covered Call Strategy
Stock Walt Disney (DIS)
CMP $ 136.00
$145 strike Call option expiring on 16 Oct, 2020 $ 4.00
Action
Buy Stock @ $136.00
Sell $145 strike Call Option @ $4.00
Scenarios on 16 Oct, 2020
Stock Price Covered Call Only Stock Buy
$125 -5.15% -8.09%
$136 2.94% 0.00%
$145 9.56% 6.62%
$155 9.56% 13.97%

Covered Call Strategy For Long Stock Portfolios

Covered Call Strategy For Long Stock Portfolios

- All prices above are indicative and can change based on market movements.

- The Payoff table scenarios are post expiry date, P/L before the expiry can vary as per the market movement.

Risks & Assumptions

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The strategy might suffer from look-ahead bias which occurs due to use of information or data in a study or simulation that would not have been known or available during the period being analyzed. This can lead to inaccurate results in the study or simulation.
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Future price movements may not be exactly the same as the historical price movements and this could lead to variation in performance.
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Testing can sometimes lead to over-optimization. This is a condition where performance results are tuned so high to the past they are no longer as accurate in the future.
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The model assumes no slippages in trading. Slippage refers to the difference between the expected price of a trade and the price at which the trade is actually executed.
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Drawdowns in actual trading can be higher than the tested system and loses could significant in the event of leverage.
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Unforeseen events can lead to variation in performance from the tested trading strategy.
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The tested result has been computed with price feeds available from Bloomberg.
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The testing environment has not considered transaction or any other costs.
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Trading indicators used for the purpose of testing has been provided by Bloomberg.
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The strategy might suffer from data mining fallacy, selection bias and backfill bias.

Data Source: Bloomberg

Arun Leslie John
Chief Market Analyst

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