Long Call Vs Covered Call Options Trading Strategy Comparison

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

Long Call Vs Covered Call

	Long Call	Covered Call


About Strategy	A Long Call Option trading strategy is one of the basic strategies. In this strategy, a trader is Bullish in his market view and expects the market to rise in near future. The strategy involves taking a single position of buying a Call Option (either ITM, ATM or OTM). This strategy has limited risk (max loss is premium paid) and unlimited profit potential. When the trader goes long on call, the trader buys a Call Option and later sells it to earn profits if the price of the underlying asset goes up. When the trader buys a call, he pays the option premium in exchange for the right (but not the obligation) to buy share or index at a fixed price by a certain expiry date. This premium is the only amount at-the-risk for trader in case the mark... Read More	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.
Market View	Bullish	Bullish
Strategy Level	Beginners	Advance
Options Type	Call	Call + Underlying
Number of Positions	1	2
Risk Profile	Limited	Unlimited
Reward Profile	Unlimited	Limited
Breakeven Point	Strike Price + Premium	Purchase Price of Underlying- Premium Recieved

When and how to use Long Call and Covered Call?

	Long Call	Covered Call
When to use?	A long call Option strategy works well when you expect the underlying instrument to move positively in the recent future. If you expect XYZ company to do well in near future then you can buy Call Options of the company. You will earn the profit if the price of the company shares closes above the Strike Price on the expiry date. However, if underlying shares don't do well and move downwards on expiry date you will incur losses (i.e. lose premium paid).	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.
Market View	Bullish When you're expecting a rise in the price of the underlying and increase in volatility.	Bullish When you are expecting a moderate rise in the price of the underlying or less volatility.
Action	Buy Call Option A long call strategy involves buying a call option only. So if you expect Reliance to do well in near future then you can buy Call Options of Reliance. You will earn a profit if the price of Reliance shares closes above the Strike price on the expiry date. However, if Reliance shares don't move up within the expiry date you will incur losses.	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.
Breakeven Point	Strike Price + Premium The break-even point for Long Call strategy is the sum of the strike price and premium paid. Traders earn profits if the price of the underlying asset moves above the break-even point. Traders loose premium if the price of the underlying asset falls below the break-even point.	Purchase Price of Underlying- Premium Recieved

Compare Risks and Rewards (Long Call Vs Covered Call)

	Long Call	Covered Call
Risks	Limited The risk is limited to the premium paid for the call option irrespective of the price of the underlying on the expiration date. Max Loss = Premium Paid	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
Rewards	Unlimited There is no limit to maximum profit attainable in the long call option strategy. The trade gets profitable when price of the underlying is greater than strike price plus premium. Profit = Price of Underlying - (Strike Price + Premium Paid)	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
Maximum Profit Scenario	Underlying closes above the strike price on expiry.	Underlying rises to the level of the higher strike or above.
Maximum Loss Scenario	Underlying closes below the strike price on expiry.	Underlying below the premium received

Pros & Cons or Long Call and Covered Call

	Long Call	Covered Call
Advantages	Buying a Call Option instead of the underlying allows you to gain more profits by investing less and limiting your losses to minimum.	It helps you generate income from your holdings. Also allows you to benefit from 3 movements of your stocks: rise, sidewise and marginal fall.
Disadvantage	Call options have a limited lifespan. So, in case the price of your underlying stock is not higher than the strike price before the expiry date, the call option will expire worthlessly and you will lose the premium paid.	Unlimited risk for limited reward.
Simillar Strategies	Protective Put, Covered Put/Married Put, Bull Call Spread	Bull Call Spread

1 Comments

1. Justin Gilead

| Link|August 16, 2022 8:47:47 PMReply

You partially get it wrong! The max loss will be the equivalent of the call premium paid for a single call position, indeed ; for a synthetic call options, it will be likened to the call options premium that you actually haven't paid as the call position has just been replicated along with the help of a long put and a long underlying though. For instance, if you purchase an ITM put, in addition to the long underlying, then the overall cost will be quite high, but the max risk entailed in the position will be the equivalent of the cheap OTM call options (only time value) that stands on the other side and on the same strike. In short, you may pay more to risk less with a synthetic options ; it definitely does the trick for hedging purposes then.

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