Covered Call with Futures and Deep In The Money Calls

Algos, strategies, code
1

Hi,

I am evaluating another strategy, its a slight variation of traditional covered call. I am doing following

  1. Buy 1 Lot Future
  2. Sell 1 Lot In The Money Call option (based on how much downside protection you want)

Let’s take an example

ITC is trading at 275.5 as of today and Feb Future is trading at 276.80, I want about 5% downside protection, I am not anticipating any profits from up move, my only profit is premium collected from Call option. So I buy a lot of Feb Fut in ITC and Sell a 260 Call which will give me a premium of 22.05. Since a 260 call is 15.5 points In The Money it has a time premium of 6.55 after deducting the future premium of about 1.3 points my net profit will be 5.25 * 2400 = 12600 approx.

So as long as ITC stay above 260 for the month of Feb I make profit. I can also buy even further deep in the money Calls which has almost same premium but it will keep on reducing as I go further in the money.

Not many of the stocks has much premium for deep in the money Calls but when you spot such a opportunity like I am seeing today or identify such stocks which frequently has this scenario, Do you think this can generate decent returns each month consistently?

Whats your opinion of this strategy, Do you see any problems with this or have any suggestions for improvement?

Thanks in Advance

2

If you sell a 260 call, for the call to be profitable, the price would need to close below 260.

Additionally, that would mean at least a Rs. 16.8 fall in the underlying. If ITC trades between 275.5 and 260, you make a loss on the futures bought as well as the call sold to the extent it closes above 260. If the price rises, you make a profit on the future but possibly an equivalent/greater loss on the call.

Lastly, buying a deep ITM call would probably lose you money due to decay.

A simpler strategy would be to just execute a normal covered call with a future and an OTM call. (However this could end up losing money if the future price falls more than the premium received for the OTM call.)