Covered OTM call

F&O
1

I have a question regarding selling OTM calls.
example: I have XYZ at 500 and I sell 490 CE of 20Rs. Breakeven of 490 is 510.
what happens if it breaches 510,

  1. do we need to wait for breakeven to breach for giving delivery or going above 490 is applicable for delivery?
  2. Will I be in net profit after 510 too?
  3. Can anyone shares the cases below 490, between 500-510 and 510+.
3

First Selling 490CE is not OTM it is ITM.

when strike is ITM u have to deliver bcz u sold CE option. whatever the MTM be doesn’t matter.

Most probably not

1.Below 490, 490CE contract is worthless. u will gain 20rs as premium. no need of delivery
2.B/W 500-510 the premium of 490CE expires with 10-20rs premium. but even if your MTM is in profit you will get that profit and need to settle the delivery
3. 510+ your MTM goes to loss on expiry whatever the loss be you will pay it and you should also deliver stock

1 Like
4

Thank you so much.

When will one be net profit considering delivery and option value like when 520CE becomes ITM and then one can deliver at 520 with some loss in option so net is profit…
What other case can lead to net profitability…

5

I din get your question right.

If your selling 520ce and if the contract is ITM then you have to delivery the shares to the buyer. Which is loss bcz u need to buy shares and give it to him.
And vice versa if you buy 520ce u will be getting shares for 520rs avg price.

6

I mean I there is holding of shares at 500 avg and I sell 520ce. It goes 530. Net would be 20 points+ prem of 520 at expiry with stock getting delivered to other party?

7

First of all this is not Cash secured OTM call, It is covered call.
Second If the Strike price is below LTP then you are writng a ITM call option.

With that, you will be in profit if you write 520 (for say 20 premium) and your average purchase price is 500 ( means capital gain of 20), Total 40 per share.

On expiry,

  • you are profitable till 540,
  • Beyond 540 also you are profitable but there is a notional loss( not a real loss, but an opportunity loss).
  • Between 520 and 540, you will have maximum profit,
  • Below 520 - You will only get 20 Rs premium as profit
1 Like
8

Thank you for clearing it out.
Regarding beyond 540, stock will be delivered at 520 but what happens to prem of ITM…
example that one 1 lot is 100 shares. so what happens if expires at 550?

9

On the day of expiry, premium price will be ~30 and you position will show (-10 x 100) = -1000, but this is notional. You already have received 20 x 100 = 2000 , when you sold the option.

But your margin gets blocked and will increase as your position moves deep ITM. you should have sufficient margin in your account (on expiry 40% of the contract value = 40% x 520 x 100 = 20,800), otherwise you will get a margin call, also your position may get squared off (means your -1000 notional loss becomes real )

1 Like
10

Thank you for explaining so nicely.
Sorry for lot of doubts.
Even if goes beyond 550 assuming 600 or so. Then prem received would be 2k but loss would be 60points assuming it goes 600. so that will result in loss?
it is at 600. so in cash it would be 20x100+ 20x100 from options=4k, what is with 60 points options gone itm?
I would be in net loss when it goes 600?

11

2k + 2K is yours, that’s your profit, if it expires anywhere above 540.
Only your notional loss increases ( 60 points in this case), which means whatever you left on the table, as we say, is more than what you grabbed.

12

I didn’t understand the last point well.
At expiry the notional loss will be there. But I will only go net profit of 4k even if stock rallies beyond 600?

13

Yes.
You are obliged to sell your holding at 520 only. plus you have already got 20 Rs premium. So net profit is only 4k.

1 Like
14

Thank you so much for explaining each point. I m really grateful.