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COVERED CALLS: RICH MAN'S RENTAL INCOME

Covered Call is an ideal strategy to generate monthly income from Selling the Call Options of an underlying asset that you already own. 


With falling rates of FDs, many people are looking to get a reasonable return on their capital without being involved in the market too much. 


Covered Calls can generate a return of 10-15% annually. 



PREREQUISITE:


- Owning an equal number of shares as the F&O lot size of the stock.


- Willing to hold the stock for a long term (at least 2-3 years).  I would recommend only Bluechip Stocks for this strategy. 


- Capital requirement (6 lakh and above) depending on the stock. (Will share some recommendations at the end)


EXAMPLE:




Let's say, you want to do this with Reliance. (Being the largest company in the country and surprisingly requires the minimum amount of capital). 


Reliance has a lot size of 250 shares. Assuming the current market price is at around 2000 you would need a capital of Rs. 5 Lakh to own 250 shares of Reliance. 


Consider this as your long-term investment. Now at the start of every month, you would Sell a Call Option 8-10% away from the current price receiving a certain premium. 


Looking at the above Option Chain for April Expiry. 10% OTM Call Option i.e 2200 CE would give you a premium of around Rs. 20/share i.e Rs. 5000 per lot.


Now 2 things can happen. 


1. The price at the end of the month is below 2200 - In this case, you get to keep the Rs. 5000 you received, yielding around 1% RoI in a month for doing nothing but owning the stock. 


2. The Price at the end of the month is above 2200 - In this case, you are liable to give away your shares at the end of the expiry. Let's say the price goes up to Rs. 2250, you'd still have to give away your shares at Rs. 2200 at the expiry date. Remember that is still a 10% gain as you bought the stock at Rs. 2000. 


Suggestion:


Holding the trade till the expiry has a lot of regularities and brokerage charges. It is best to the square of the position on Monday/Tuesday of the last week of the expiry. Overall Profit would marginally be affected but still not worth holding it till expiry. 


Additional Info: 


To get margin benefits for selling the Call Options, you will need to pledge your shares to your broker. (Kindly contact your broker regarding the same). Zerodha has a minimum cost of around Rs. 30 or so for pledging your shares. 


Even after pledging, you will need some cash margin, (hence for Reliance I assumed 6 lakh). 


Always better to square off your positions manually 2-3 days before the expiry and enter into the next month. 


The only underlying risk that I see with Covered Calls is the underlying stock price falling drastically over the long run. 


Worst-case Scenario: let's assume at the end of 3 years RIL losses 25% from the current date and is trading around Rs. 1500. (which is highly improbable but still a chance) But you still would have made 30-40% in that time by selling Calls every month. You can even reinvest by buying more shares of Reliance with that profit and average out your holdings. 


According to me, this is the best form of inactive trading for people who have such kind of capital. Still, trade at your own risk. ✌🏻 


SOME OTHER RECOMMENDATIONS: 


To buy 1 lot of some other BLUECHIP stocks you'd need larger capital (IN RS)


1. TCS - 9.5 LAKH


2. MARUTI - 7 LAKH


3. TATA MOTORS - 17 LAKH


4. CIPLA - 10.5 LAKH


5. HDFCBANK - 8.5 LAKH


6. SBI - 10.8 LAKH


7. KOTAK BANK - 7.2 LAKH


8. ICICI BANK - 8 LAKH


9. ITC - 6.8 LAKH


10. ASIANPAINTS - 7.5 LAKH


11. PIDILITE - 9 LAKH


12. AIRTEL - 9.8 LAKH


13. L&T - 8.1 LAKH


14. NIFTY BEES - 12.5 LAKH (safest option)

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