to put it straight, its absolutely stupid to write options against your holdings.you may not be expecting a big move in next 12 months, but stock prices rarely behave as per our expectations. if any of those stocks has to fall by 50 % in next twelve months then you would be certainly holding it, but if it has to go up by 50 % or double or triple then what are you going to gain, just a little premium. whats the point putting your money at risk with such a return reward ratio? . i guess you are very new to trading, so i suggest you refrain from option writing till you see at least one bull and bear phase.
1.Is it prudent to write Call Options in above stocks for regular income?
Yes, if current price of the stocks are above your purchase price.
Try selling OTM options for small premium each month. If in case the stock does spike up and crosses above your strike sold - your cash holding makes money; your sold call options loses money. But you can always roll up the strike if this were to happen.
2.If yes please explain the strategies(ATM,ITM? exit strategies and if anything else) should I follow?
sell OTM; premium would be less but probablity of keeping the premium would be high.
exit/roll over to further OTM strike if your sold strike becomes ITM.
this selling premium against your holding is a good way to earn income regularly and also bring down your overall cost of stock holding.
As much as time you have holdings you can short CE Options some times you ready to book the pretty losses when stock moves to upside,in this case holdings gives you profits suggestion write the ATM and OTM not INM this is known as covered call.
Writing Stock Call Options against an Long term Investment in a Stock is an excellent way of bringing down the breakeven point of your investment. This is a strategy used by many long term funds like Pension funds, etc.
Few things we should try to avoid is selling stock calls options when the stock is rallying, & selling them cheaply.
When the whole stock market is bearish, one can sell call options & use the premium to buy puts to hedge the downside.
Basically writing call options for a portfolio holding is called Covered Call strategy which is used in hedging positions. Yes, you may write call options against your holdings & If done in a right way, this can surely be a way to consistent stream of income & can even accentuate your returns.
The advantage with this strategy is that you will not require any extra margin to execute the short option, which is otherwise equivalent to futures margin.( If you sell naked calls).
But you must take care of the fact that you can ascertain the right levels technically, otherwise you will end up limiting your profits.
For example: Let say, you bought 100 shares of Reliance 870/-.Current price of Reliance is quoting at 845 levels and your analysis says that this month 870 levels wont be taken out, you may short 870 CE trading at lets say, 10.00.
Premium collected will be =250 (Lot Size) *10=2500.
Extra Margin required = NIL
If Reliance remains below 870 on March expiry, you will keep the premium thus lowering your overall cost of holding.
The problem arises , when your analysis goes wrong. For example in this case,
If reliance continues to rise >870 odd levels, your call option will start to lose money, thus limiting your profits in cash holding, too. Profits will be limited upto 870, even if the stock rises to 900 odd levels.
Buying price = 800
Price at Current expiry = 890
Price of 870 CE at expiry = 20 (Current Price- Strike Price)
Loss in 870 CE= 20-10 (10 = Price at which 870 CE was shorted)
=10*250= -2500
Actual Profit/Loss in this case= ((100*(890-870)+(-2500))= -500
So, the crux is to analyse the levels very rightfully, which comes from learning technical aspects of charting.
Thanks for your reply. yes I am inexperianced in trading but not Investing.( I am investing since 2006 made multi million so for). this question may not be smart enough but certainly not stupid,…google it…
Extremely thankful to you. If you explain with example or link to some best reading from Indian context , would be very helpful to me and fellow boarders.
is there a loss in this case? If the purchase price is 800 and the spot price on expiry is 890, the 870 call option will be 20 rupees on expiry. So he gets to profit of 70 (870-800) * lot size and also he will keep to himself the call premium collected. So total profit will be (70+10)*250 = 20000/-. Of course he will lose the shares.
Can you please explain…I think I understand but want to clarify one doubt.
For example I sold SBI for 200 strike and got 5 Rs. premium so until 205 I am fine but if I see it is about to above 205 than I should square off and open new sell position let’s say at 20 Rs.
Or I should wait until it goes above Rs. 205 at the end of day and than next day if it is still above my breakeven than I should square off and open new position?