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)


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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