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Short Call (Naked Call) Vs Covered Call Options Trading Strategy Comparison

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

Short Call (Naked Call) Vs Covered Call

  Short Call (Naked Call) Covered Call
Short Call (Naked Call) Logo Covered Call Logo
About Strategy Short Call (or Naked Call) strategy involves the selling of the Call Options (or writing call option). In this strategy, a trader is Very Bearish in his market view and expects the price of the underlying asset to go down in near future. This strategy is highly risky with potential for unlimited losses and is generally preferred by experienced traders. The strategy involves taking a single position of selling a Call Option of any type i.e. ITM or OTM. These naked calls are also known as Out-Of-The-Money Naked Call and In-The-Money Naked Call based on the type you choose. This strategy has limited rewards (max profit is premium received) and unlimited loss potential. When the trader goes short on call, the trader sells a call option and e... 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 Bearish Bullish
Strategy Level Advance Advance
Options Type Call Call + Underlying
Number of Positions 1 2
Risk Profile Unlimited Unlimited
Reward Profile Limited Limited
Breakeven Point Strike Price of Short Call + Premium Received Purchase Price of Underlying- Premium Recieved

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

  Short Call (Naked Call) Covered Call
When to use?

It is an aggressive strategy and involves huge risks. It should be used only in case where trader is certain about the bearish market view on the underlying.

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 Bearish

When you are expecting the price of the underlying or its volatility to only moderately increase.

Bullish

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

Action
  • Sell Call Option

  • 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 of Short Call + Premium Received

Break even is achieved when the price of the underlying is equal to total of strike price and premium received.

Purchase Price of Underlying- Premium Recieved

Compare Risks and Rewards (Short Call (Naked Call) Vs Covered Call)

  Short Call (Naked Call) Covered Call
Risks Unlimited

There risk is unlimited and depend on how high the price of the underlying moves.

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 Limited

The profit is limited to the premium received.

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

When underline asset goes down and option not exercised.

  • Max Profit = Premium Received
  • Max Profit Achieved When Price of Underlying <= Strike Price of Short Call

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

Maximum Loss Scenario

When underline asset goes up and option exercised.

  • Maximum Loss = Unlimited
  • Loss Occurs When Price of Underlying > Strike Price of Short Call + Premium Received
  • Loss = Price of Underlying - Strike Price of Short Call - Premium Received

Underlying below the premium received

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

  Short Call (Naked Call) Covered Call
Advantages

This strategy allows you to profit from falling prices in the underlying asset.

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

There's unlimited risk on the upside as you are selling Option without holding the underlying.

Rewards are limited to premium received only.

Unlimited risk for limited reward.

Simillar Strategies Covered Put, Covered Calls, Bear Call Spread Bull Call Spread







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