Short Put Vs Covered Call Options Trading Strategy Comparison

Short Put works well when you're Bullish that the price of the underlying will not fall beyond a certain level.

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.

When you are expecting the price or volatility of the underlying to increase marginally.

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

• Sell Put Option

A short put strategy involves selling a Put Option only. So if you see that the shares of a Company A will not move below a 1000 then you sell the Put Option of that stock at 1000 and receive the premium amount. The premium received will be the maximum profit you can earn from this deal. However, if the price of the underlying moves below 1000 than 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.

There is no limit to losses incurred in the trade. The risk is when the price of the underlying falls, and the Put is exercised. You are then obliged to buy the underlying at the strike price.

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

The profit is limited to premium received in your account when you sell the Put Option.

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

Underlying doesn't go down and options remain exercised.

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

Underlying goes down and options remain exercised.

Underlying below the premium received

It allows you benefit from time decay. And earn income in a rising or range bound market scenario.

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 is a high risk strategy and may cause huge losses if the price of the underlying falls steeply.

Unlimited risk for limited reward.

Bull Put Spread, Covered Call, Short Straddle