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Covered Call Vs Short Straddle (Sell Straddle or Naked Straddle) Options Trading Strategy Comparison

Compare Covered Call and Short Straddle (Sell Straddle or Naked Straddle) options trading strategies. Find similarities and differences between Covered Call and Short Straddle (Sell Straddle or Naked Straddle) strategies. Find the best options trading strategy for your trading needs.

Covered Call Vs Short Straddle (Sell Straddle or Naked Straddle)

  Covered Call Short Straddle (Sell Straddle or Naked Straddle)
Covered Call Logo Short Straddle (Sell Straddle or Naked 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 Short Straddle (or Sell Straddle or naked Straddle) is a neutral options strategy. This strategy involves simultaneously selling a call and a put option of the same underlying asset, same strike price and same expire date. A Short Straddle strategy is used in case of little volatility market scenarios wherein you expect none or very little movement in the price of the underlying. Such scenarios arise when there is no major news expected until expire. This is a limited profit and unlimited loss strategy. The maximum profit earned when, on expire date, the underlying asset is trading at the strike price at which the options are sold. The maximum loss is unlimited and occurs when underlying asset price moves sharply in upward or down... Read More
Market View Bullish Neutral
Strategy Level Advance Advance
Options Type Call + Underlying Call + Put
Number of Positions 2 2
Risk Profile Unlimited Unlimited
Reward Profile Limited Limited
Breakeven Point Purchase Price of Underlying- Premium Recieved 2 Breakeven Points

When and how to use Covered Call and Short Straddle (Sell Straddle or Naked Straddle)?

  Covered Call Short Straddle (Sell Straddle or Naked 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.

This strategy is to be used when you expect a flat market in the coming days with very less movement in the prices of underlying asset.

Market View Bullish

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

Neutral

When trader don't expect much movement in its price in near future.

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.

  • Sell Call Option
  • Sell Put Option

Breakeven Point Purchase Price of Underlying- Premium Recieved
2 Breakeven Points

There are 2 break even points in this strategy. The upper break even is hit when the underlying price is equal to the total of strike price of short call and net premium paid. The lower break even is hit when the underlying price is equal to the difference between strike price of short Put and net premium paid.

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 Short Straddle (Sell Straddle or Naked Straddle))

  Covered Call Short Straddle (Sell Straddle or Naked 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

Unlimited

There is a possibility of unlimited loss in the short straddle strategy. The loss occurs when the price of the underlying significantly moves upwards and downwards.

Loss = Price of Underlying - Strike Price of Short Call - Net Premium Received

Or

Loss= Strike Price of Short Put - Price of Underlying - Net Premium Received

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

Limited

Maximum profit is limited to the net premium received. The profit is achieved when the price of the underlying is equal to either strike price of short Call or Put.

Maximum Profit Scenario

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

Both Option not exercised

Maximum Loss Scenario

Underlying below the premium received

One Option exercised

Pros & Cons or Covered Call and Short Straddle (Sell Straddle or Naked Straddle)

  Covered Call Short Straddle (Sell Straddle or Naked 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.

It allows you to benefit from double time decay and earn profit in a less volatile scenario.

Disadvantage

Unlimited risk for limited reward.

Unlimited losses if the price of the underlying move significantly in either direction.

Simillar Strategies Bull Call Spread Short Strangle, Long Straddle