Long Put Vs Covered Call Options Trading Strategy Comparison

A long put option strategy works well when you're expecting the underlying asset to sharply decline or be volatile in near future.

The covered call option strategy works well when you have a mildly Bullish market view and you expect the price of your holdings to moderately rise in future.

When you are expecting a drop in the price of the underlying and rise in the volatility.

When you are expecting a moderate rise in the price of the underlying or less volatility.

• Buy Put Option

Let's assume you're Bearish on Nifty currently trading at 10,400. You expect it to fall to 10,000 level. You buy a Put option with a strike price 10,000. If the Nifty goes below 10,000, you will make a profit on exercising the option. In case the Nifty rises contrary to expectation, you will incur a maximum loss of the premium.

• Buy Underlying
• Sell OTM Call Option

Let's assume you own TCS Shares and your view is that its price will rise in the near future. You will Sell OTM Call Option of TCS at a price, where you target to sell your shares. You will receive premium amount for selling the Call option and the premium is your income.

The breakeven is achieved when the strike price of the Put Option is equal to the premium paid.

The risk for this strategy is limited to the premium paid for the Put Option. Maximum loss will happen when price of underlying is greater than strike price of the Put option.

Maximum loss is unlimited and depends on by how much the price of the underlying falls. Loss happens when price of underlying goes below the purchase price of underlying.

Loss = (Purchase Price of Underlying - Price of Underlying) + Premium Received

This strategy has the potential to earn unlimited profit. The profit will depend on how low the price of the underlying drops.

You earn premium for selling a call. Maximum profit happens when purchase price of underlying moves above the strike price of Call Option.

Max Profit= [Call Strike Price - Stock Price Paid] + Premium Received

Underlying goes down and Option exercised

• Maximum Profit = Unlimited
• Maximum Profit Achieved When Price of Underlying = 0
• Profit = Strike Price of Long Put - Premium Paid

Underlying rises to the level of the higher strike or above.

Underlying goes up and Option not exercised

• Max Loss = Premium Paid + Commissions Paid
• Max Loss Occurs When Price of Underlying >= Strike Price of Long Put

Underlying below the premium received

Unlimited profit potential with risk only limited to loss of premium.

It helps you generate income from your holdings. Also allows you to benefit from 3 movements of your stocks: rise, sidewise and marginal fall.

You may incur 100% loss in premium if the underlying price rises.

Unlimited risk for limited reward.