Compare Strategies:

Covered Call Vs Long Straddle (Buy Straddle) Options Trading Strategy Comparison

Compare Covered Call and Long Straddle (Buy Straddle) options trading strategies. Find similarities and differences between Covered Call and Long Straddle (Buy Straddle) strategies. Find the best options trading strategy for your trading needs.

Covered Call Vs Long Straddle (Buy Straddle)

  Covered Call Long Straddle (Buy Straddle)
Covered Call Logo Long Straddle (Buy Straddle) Logo
About Strategy A Covered Call is a basic option trading strategy frequently used by traders to protect their huge share holdings. It is a strategy in which you own shares of a company and Sell OTM Call Option of the company in similar proportion. The Call Option would not get exercised unless the stock price increases. Till then you will earn the Premium. This a unlimited risk and limited reward strategy. Let's assume you own TCS Shares and your view is that its price will rise in the near future. You will Sell OTM Call Option of TCS at a price, where you target to sell your shares. You will receive premium amount for selling the Call option and the premium is your income. The Long Straddle (or Buy Straddle) is a neutral strategy. This strategy involves simultaneously buying a call and a put option of the same underlying asset, same strike price and same expire date. A Long Straddle strategy is used in case of highly volatile market scenarios wherein you expect a big movement in the price of the underlying but are not sure of the direction. Such scenarios arise when company declare results, budget, war-like situation etc. This is an unlimited profit and limited risk strategy. The profit earns in this strategy is unlimited. Higher volatility results in higher profits. The maximum loss is limited to the net premium paid. The max loss occurs when underlying asset price on expire remains at the strike price. ... Read More
Market View Bullish Neutral
Strategy Level Advance Beginners
Options Type Call + Underlying Call + Put
Number of Positions 2 2
Risk Profile Unlimited Limited
Reward Profile Limited Unlimited
Breakeven Point Purchase Price of Underlying- Premium Recieved 2 break-even points

When and how to use Covered Call and Long Straddle (Buy Straddle)?

  Covered Call Long Straddle (Buy Straddle)
When to use?

The covered call option strategy works well when you have a mildly Bullish market view and you expect the price of your holdings to moderately rise in future.

The strategy is perfect to use when there is market volatility expected due to results, elections, budget, policy change, war etc.

Market View Bullish

When you are expecting a moderate rise in the price of the underlying or less volatility.

Neutral

When you are not sure on the direction the underlying would move but are expecting the rise in its volatility.

Action
  • Buy Underlying
  • Sell OTM Call Option

Let's assume you own TCS Shares and your view is that its price will rise in the near future. You will Sell OTM Call Option of TCS at a price, where you target to sell your shares. You will receive premium amount for selling the Call option and the premium is your income.

  • Buy Call Option
  • Buy Put Option

Breakeven Point Purchase Price of Underlying- Premium Recieved
2 break-even points

A straddle has two break-even points.

Lower Breakeven = Strike Price of Put - Net Premium

Upper breakeven = Strike Price of Call + Net Premium

Compare Risks and Rewards (Covered Call Vs Long Straddle (Buy Straddle))

  Covered Call Long Straddle (Buy Straddle)
Risks Unlimited

Maximum loss is unlimited and depends on by how much the price of the underlying falls. Loss happens when price of underlying goes below the purchase price of underlying.

Loss = (Purchase Price of Underlying - Price of Underlying) + Premium Received

Limited

The maximum loss for long straddle strategy is limited to the net premium paid. It happens the price of underlying is equal to strike price of options.

Maximum Loss = Net Premium Paid

Rewards Limited

You earn premium for selling a call. Maximum profit happens when purchase price of underlying moves above the strike price of Call Option.

Max Profit= [Call Strike Price - Stock Price Paid] + Premium Received

Unlimited

There is unlimited profit opportunity in this strategy irrespective of the direction of the underlying. Profit occurs when the price of the underlying is greater than strike price of long Put or lesser than strike price of long Call.

Maximum Profit Scenario

Underlying rises to the level of the higher strike or above.

Max profit is achieved when at one option is exercised.

Maximum Loss Scenario

Underlying below the premium received

When both options are not exercised. This happens when underlying asset price on expire remains at the strike price.

Pros & Cons or Covered Call and Long Straddle (Buy Straddle)

  Covered Call Long Straddle (Buy Straddle)
Advantages

It helps you generate income from your holdings. Also allows you to benefit from 3 movements of your stocks: rise, sidewise and marginal fall.

Earns you unlimited profit in a volatile market while minimizing the loss.

Disadvantage

Unlimited risk for limited reward.

The price change has to be bigger to make good profits.

Simillar Strategies Bull Call Spread Long Strangle, Short Straddle







Search Chittorgarh.com:

Download Our Mobile App

Android App iOS App