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Covered Call Vs Short Strangle (Sell Strangle) Options Trading Strategy Comparison

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

Covered Call Vs Short Strangle (Sell Strangle)

  Covered Call Short Strangle (Sell Strangle)
Covered Call Logo Short Strangle (Sell Strangle) 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 Strangle (or Sell Strangle) is a neutral strategy wherein a Slightly OTM Call and a Slightly OTM Put Options are sold simultaneously of same underlying asset and expiry date. This strategy can be used when the trader expects that the underlying stock will experience a very little volatility in the near term. It is a limited profit and unlimited risk strategy. The maximum profit earn is the net premium received. The maximum loss is achieved when the underlying moves either significantly upwards or downwards at expiration. A net credit is taken to enter into this strategy. For this reason, the Short Strangles are Credit Spreads. The usual Short Strangle Strategy looks like as below for NIFTY current index value at 10400 (NIFTY S... 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 two break-even points

When and how to use Covered Call and Short Strangle (Sell Strangle)?

  Covered Call Short Strangle (Sell Strangle)
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 Short Strangle is perfect in a neutral market scenario when the underlying is expected to be less volatile.

Market View Bullish

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

Neutral

When you are expecting little volatility and movement in the price of the underlying.

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 OTM Call
  • Sell OTM Put

Sell 1 out-of-the-money put and sell 1 out-of-the-money call which belongs to same underlying asset and has the same expiry date.

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

A strangle has two break-even points.

Lower Break-even = Strike Price of Put - Net Premium

Upper Break-even = Strike Price of Call+ Net Premium"

Compare Risks and Rewards (Covered Call Vs Short Strangle (Sell Strangle))

  Covered Call Short Strangle (Sell Strangle)
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

The maximum loss is unlimited in this strategy. You will incur losses when the price of the underlying moves significantly either upwards or downwards at expiration.

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

For maximum profit, the price of the underlying on expiration date must trade between the strike prices of the options. The maximum profit is limited to the net premium received while selling the Options.

Maximum Profit = Net Premium Received

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 Strangle (Sell Strangle)

  Covered Call Short Strangle (Sell Strangle)
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.

The strategy offers higher chance of profitability in comparison to Short Straddle due to selling of OTM Options.

Disadvantage

Unlimited risk for limited reward.

Limited reward with high risk exposure.

Simillar Strategies Bull Call Spread Short Straddle, Long Strangle







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