Use alternative call strategies to derive better downside protection in call options
Those who are involved in options trading follow the covered-call strategy as a standardized move to make profits and minimize risks. However, there are many deviations to this strategy that can work under different situations, reap profits, and other benefits too.
One such strategy is to write/sell in-the-money-covered calls. This strategy provides greater protection from the downsides while still giving you the chance to make good profits.
Let us discuss how this strategy works and ways to implement it.
Steady Option is a platform from where you can learn this strategy and many others directly from experts in their options trading forum. It is not a get-rich-quick website and does not provide market trend predictions. It is a website to help you learn trade moves that are profitable and have been used by many traders before you. It can help you in learning the various ways which when applied can get you gains consistently while minimizing the risks at the same time.
To know how to exercise this alternative strategy, let us first understand the standard covered-call method.
Covered-call write: Traditional way
In this method, you would choose a good moving stock with a high premium value in a month’s cycle. Close to expiration, we will sell them “at-the-money” or “out-of-the-money” call options. This would provide the following benefits:
- Upside profit can go up to the pre-agreed price or strike price.
- The additional premium that one would get after selling the options.
However, this strategy provides very little cushion against downside protection. Any declines and you will have to incur losses.
An alternative strategy to covered-call write
In this strategy, you will be selling the covered-call options “in-the-money” on days that offer the highest premium. The premium collected would be your profit potential for your call options.
This strategy provides decent downside protection. Thus, if a stock falls up to the percentage of downside protection, you will not incur losses. The benefits of this strategy are:
- Zero upside risk
- Good downside protection
- A wider zone for profit potential.
- Higher potential rate of return because of lower cost basis.
Also, this strategy provides a delta neutral zone that allows you to collect high premiums because the delta value of “in-the-money” call options is very high. So, even though the profit potential is less when compared to the traditional strategy, you will cover that up with a pure premium collection.
Also, you can make profits with this strategy irrespective of the direction in which the stock moves because the source of profit here is the premium that increases due to the decay-in-time factor.
Although at a glance, the potential return seems low it will add up if you increase the time opportunity value here. Not to forget, the benefits of lower downside risk that is good for your mental peace.
However, remember that this strategy can be best used on stocks that have higher implied volatility which is an occasional case scenario. In a nutshell, if you want to get better protection when the movement of stocks is not in your favor, in-the-money call options are just right for you.