Chittorgarh.com Logo
Loading...
Compare Strategies:

Synthetic Call Vs Covered Call Options Trading Strategy Comparison

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

Synthetic Call Vs Covered Call

  Synthetic Call Covered Call
Synthetic Call Logo Covered Call Logo
About Strategy A Synthetic Call strategy is used by traders who are currently holding the underlying asset and are Bullish on it for the long term. But he is also worried about the downside risks in near future. This strategy offers unlimited reward potential with limited risk. The strategy is used by buying PUT OPTION of the underlying you are holding for long. If the price of the underlying rises then you make profits on holdings. If it falls then your loss will be limited to the premium paid for PUT OPTION. 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 + Underlying Call + Underlying
Number of Positions 2 2
Risk Profile Limited Unlimited
Reward Profile Unlimited Limited
Breakeven Point Underlying Price + Put Premium Purchase Price of Underlying- Premium Recieved

When and how to use Synthetic Call and Covered Call?

  Synthetic Call Covered Call
When to use?

A Synthetic Call option strategy is when a trader is Bullish on long term holdings but is also concerned with the associated downside risk.

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
Bullish

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

Action
  • Buy Underlying
  • Buy Put Option

The strategy is used by buying PUT OPTION of the underlying you're holding for long. If the price of the underlying rises then you make profits on holdings. If it falls then your loss will be limited to the premium paid for PUT 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 Underlying Price + Put Premium
Purchase Price of Underlying- Premium Recieved

Compare Risks and Rewards (Synthetic Call Vs Covered Call)

  Synthetic Call Covered Call
Risks Limited

Maximum loss happens when price of the underlying moves above strike price of Put.

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

Maximum profit is realized when price of underlying moves above purchase price of underlying plus premium paid for Put Option.

Profit = (Current Price of Underlying - Purchase Price of Underlying) - 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 goes up

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

Maximum Loss Scenario

Underlying goes down and option exercised

Underlying below the premium received

Pros & Cons or Synthetic Call and Covered Call

  Synthetic Call Covered Call
Advantages

Provides protection to your long term holdings.

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

You can incur losses if underlying goes down and the option is exercised.

Unlimited risk for limited reward.

Simillar Strategies Married Put Bull Call Spread