May 28, 2016

SBIN covered call writing

Past few months, I have been writing ATM calls in SBI while holding delivery of same quantity. This has generated a option writing income of 15K-20K per month with delivery position currently breakeven.

Now something funny happened. On the day marked with the arrow, I squared off a previous short position in 185 call at 10 paise and simultaneously sold 165 call (JUN series) at Rs.10/-.

And the markets blasted from thereon. Now this being a long series, the 165 call should have been trading around 35 but surprise of surprises, it is trading around 25. So my loss is Rs.15 in short call but there is also a notional profit of Rs.30 on delivery. Overall gain is therefore Rs.15 in 4-5 days.

Since the highest income possible in call writing is limited to the premium earned, the transaction here has generated higher profits because of fast gain in underlying and drop in IV of the stock.

This means there is no real reason to hold trade till expiry as the max profit is already available today.

Breakout above 200 will generate more upsides (20-25%) so it will make sense to trade on hourly charts next few weeks.






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