Updated: Nov 16, 2019
You can use this strategy for making a consistent profit every month.
Condition: This strategy is useful when you have a long term view on any particular stock which does not fluctuate a lot, but has very strong fundamentals.
Action: Buy Stock in the cash market and Sell Call Option
View: Neutral or Bullish on the chart. Example: Suppose we are willing to buy ITC (in cash market) for long term whose market price is 283 Rs. But, at the same time, we want to earn some money if it does not move upward. In this case, we will buy the stock in the cash market at 283 Rs and sell the call of option at the strike price of 290. (i.e.slightly Out of The Money)
So, we bought the stock at 283 Rs and received a premium of Rs 4.4 for selling the Call.
Net outflow = Rs. 283 – Rs. 4.4 = Rs. 278.6.
Thus we have reduced the cost of buying the stock by this strategy. As we have sold Call at the strike of 290 and got a premium of 4.4 Rs.( So the maximum profit from this call can be 4.4 Rs. and loss can be unlimited from this call.)
Maximum Risk: Stock price - Call Premium i.e. 283 - 4.4=278.6 Rs. (In case stock value becomes zero, which is practically not possible)
Breakeven point: We will be in profit till the time stock price is above Stock Buying Price- Premium
Maximum Profit: Strike Price - Stock Price + Premium
Net payoff chart on expiry is as follows:
Note: As I have mentioned, use this strategy only when the stock is Neutral or Bullish on the chart.