Covered Calls on Commodities(Gold, Crude-oil) and Currency


Has anyone tried Covered Calls on Gold/Crude Oil Futures or Currency Futures. Idea is simple Assets like commodity has almost zero risk of going down to 0. based on past record of USDINR it never moves more than 2-3% in a single month, on an average it only moves 0.5%. An option on the next strike is trading about 0.8235 at the start of month, other good thing is the margin required is only about 2800. Example trade:

USDINR MAY FUT trading at 69.52
USDINR MAY 69.75 CE trading @ 0.8235
Lot Size : 1000
Margin Required(for both Fut and Opt) : 2800
Min Profit : 823.5 per lot (about 30% on the capital deployed)
Max Profit : 1073 per lot (if USDINR reaches 69.75)

Potential Risk : 1390 (assuming a max 2% downside).
Summary: On a capital of 2800 this trade can generate from 823 to 1073 (almost) guaranteed profit at the potential risk of 1390(which is again almost guaranteed to revert back to its mean position if given enough time), note : all numbers are approximates taken from real data.

Most important fact on which this strategy is based on is that currencies can never go to zero and they trade in a tight range. Same applies to Gold, it can never go down to zero and in case of Gold even the premiums are about 40000 per lot but at the cost of slightly high margin(about 167000)

So this strategy can be used to generate regular income from selling premium on assets that have very low volatility and hence removing the downside risk of the trade which is also the only risk with covered calls.

Whats your thought on this strategy?


If this is so easy why others won’t replicate it, also currencies and commodities are not spot assets to write covered calls on them and earn regular income, they are highly leveraged assets. To buy 1 usdinr one require under 2k for a contract value of 70k, means it is already 35 times leveraged product, hence even if it moves by 1 rupee one can loose up to 50% of total capital.Hence writing calls on leveraged products to earn regular income should be done with extreme caution.

Hey Siva,

I was expecting a little more technical answer when I saw an answer from you. Lets keep aside why others won’t do it (is that even a logic).

Let’s talk about the technicalities.

  1. Covered Calls not necessarily needs to be done on spot only, It can be done on futures contracts very easily by buying futures contracts and selling options against that, so technically covered calls can be done on commodity and currencies which has futures and options contracts until there are some regulations from exchanges and that’s the point of starting this discussion to find out if there are any such.

  2. Yes, Currencies are highly leveraged products which requires very low margins and there is a reason for that, Currencies will NEVER tank down to zero or even a sharp decline almost never happens. Exchanges decide margin requirement for any asset based on its risk profile, that’s why we have higher margin required for highly volatility assets and low margin requirement for low volatility assets. Let me know if I got this right since you might be having better knowledge on this.

  3. Now there is inherent risk with covered calls, there is no denying in that but that’s whole the point of trying it with currencies, to reduce the downside risk(which is the only risk) since we are almost sure currencies will never tank down too much. In my experience covered call is the only strategy that guarantees profit from on leg of trade we only need to manage the other leg of trade so that it doesn’t go down too much.

  4. The way you have presented is Ok if we look at it from the perspective of capital deployed, but lets look at it from a different point of view. I intend to continue this trade for long term to make sure that price reverts back to its mean value in case price falls, in the meantime I will still receive income from premium. however if you do the same on any other asset like equity or anything else there is definitely huge downside risk which is difficult to manage. So if you believe covered calls are possible on equity I certainly believe its possible on currencies, risk profile is exactly the same in both cases even with equity you can blew up same portion of your capital if done wrong. The only difference there is capital deployed which is very high in case of equity and very low in case of currency, if there had been a spot market(you can actually purchase currency in physical form) then the point of leverage would have been eliminated altogether since you would have to deploy the entire amount(approx 70k instead of 2k)

  5. About commodities my thought was that for something like Gold which is considered a safe haven among asset classes specially among us Indians, Is it even possible that it can tank down significantly? Off course there can be some downside every now and then but certainly not a possibility of going down to zero or even half, but yes in case of Gold margins, PL per tick is higher which would require a lot of discipline, risk and money management.

  6. Actual reason I am worried about before getting into this strategy is liquidity and the premium that I would have to pay on futures contract, Those are the only problems I have been able to identify so far, I need to have enough liquidity in options to be able to sell the options. My view is that if I am on sell side I should be able to get in since there will be more buyers than sellers in currency options (and reason for that is low capital requirement, classic option theory), another interesting fact is that currencies do not have STT which should be able to compensate the future premium somewhat.

I have been doing covered calls on Nifty and ITC for more than 6 months continuously now and no surprise it has been successful. Only thing that keeps me worried(and keeps most traders out of CC) is the risk on downside, I have seen ITC go down from 295 to 275 in last few month but I held on to my positions kept on selling calls and now its back to 307.

To summarize my whole point with this approach is to trade CC in assets that has very low volatility and strong reasons to back that fact that these won’t go down significantly hence reducing the downside risk to a large extent. There are however still risks which needs to be managed, with small, consistent and almost guaranteed profits.

I have tried to make it more clear, Hope I will hear from you now on point answers to my queries, rest I will try it out and share the results.

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Are you from Mumbai…? And can you please mail me your number on [email protected]


No Chandan. I am from Gurgaon.

You got the concept of writing covered calls on commodities/currencies wrongly. I am not saying these can’t be done on futures, I am just saying the risk - return trade-off is not worth enough to initiate calls on these on consistent basis to earn small/fixed income. Also commodities are most volatile instruments, for ex consider crude only, see the move of it on weekly time frame.

As you said currencies won’t go to zero but that doesn’t mean they can’t fall or rise sharply in quick time, general theory says currencies and mostly interest rates work on the concept of mean reversion, it means once they are away from the mean they tend to revert to mean, but for currencies this mean changes structurally over years and to find that require solid skills both at macro level and fundamental level. So, it is not so easy and straight forward for any amateur to make continuous fixed income by writing covered calls on this.

Even if you make some money continuously for few months one wrong event can wipe out all that and may make you loose all your capital as these are highly leveraged products.

Also equities and currencies are two different asset classes and don’t compare each other.

Nothing as such “guaranteed profits” in markets.

How have I got it wrong? Its possible that profits will be small and off course risk to the downside is unlimited which I have already agreed to but isn’t that the point of covered call small profits on long term up trending assets? how do you think it is different than equity in any bad way or in any way?

If you look at the chart that your presented Volume is only 689K while most large caps would trade in millions in daily volume, and that can happen in any equity stock as well.

Can you please clarify? Just try to compare it with Covered Call in Equity vs Covered Calls in Currency, debate on risk reward of Covered Calls can be endless.

Although I said “almost guaranteed profits” but there guaranteed profits in market just not the large ones, small and consistent ones. Arbitrage is one such example.

Why one want to take unlimited risk with limited profit when the probability of happening either is 50%.

What does that mean for currencies?

First, both are different asset classes can’t compare them to each other. Equities are zero leveraged and currencies are highly leveraged. In the long run currencies depends on macros where as equities depends on company fundamentals.

You really lost it here comparing volumes of crude with stocks, for crude it is in lots for equity it is in number of shares. Also both are two different asset classes.

Free money( Arbitrage) is difficult to spot and particularly difficult for retailers to spot and act.

Generally covered calls are done on equities by people who has intention to hold them for long term and earn some profit by holding so. Here, after every monthly expiry one has to initiate a trade on futures which come with some extra cost. I am not saying one can’t do this but don’t generalize it and say this is a way to earn consistent small profits with out quoting risks involved.

Note- You are undermining the power of leverage, which is the most important point to consider in this case.

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because that’s what Covered Calls are, a trade with very high probability of success which I am referring to as “almost guaranteed profit”. Are you suggesting that Covered Calls are not worth at all, Risk Reward ratio for Covered Calls is always unlimited risk/limited profit.

As per my understanding currencies are primarily driven by interest rates, for this scenario I had USDINR in mind not any currencies in general. Currencies in countries with higher interest rates almost always tend to be cheaper which in this case Indian currencies will be cheaper as long as India as higher interest rates than US. “Currency Carry Trade” is based on this idea only. So Yes as long as interest rates are higher in India I have a long term bullish view on USDINR.

To make it simple lets remove the leverage from picture at all. We will buy USD in physical form maybe from a bank instead of future, will that be any different than? Not sure if Equity being based on fundamentals has any other impact if I as a trader has a bullish view be it a stock or a currency.

Yes you are right.

Difficult not impossible, so yes there is guaranteed profits we just need find the right approach.

I said that in the very beginning that I intend to do this approach for a long term, I can hold onto USDINR or GOLD for a very long time and that’s the core of this approach.

What I have got till now from you is that you are concerned about leverage since it gives a sense of discomfort, also what you are suggesting is that with Equity you can form a long term bullish of view on a stock but on a currency like USDINR for some reason you can’t form a long term bullish view?
Also there is a concern of rolling over the future contract every month if we do it by using futures which seems to be pretty valid point.

Have you tried this strategy ???
Is it work ??