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IDFC FIRST Covered Call Option Strategy 09079021

The document discusses IDFC First Bank's covered call strategy. It explains that the strategy involves holding the underlying stock and writing call options on the stock to generate additional income. It provides an example of writing out-of-the-money call options on shares of IDFC First Bank held in a delivery position. The strategy aims to profit from premium income if the stock stays below the strike price, while capping upside if the stock rises above the strike.

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382 views3 pages

IDFC FIRST Covered Call Option Strategy 09079021

The document discusses IDFC First Bank's covered call strategy. It explains that the strategy involves holding the underlying stock and writing call options on the stock to generate additional income. It provides an example of writing out-of-the-money call options on shares of IDFC First Bank held in a delivery position. The strategy aims to profit from premium income if the stock stays below the strike price, while capping upside if the stock rises above the strike.

Uploaded by

forgi misty
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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IDFC First Bank Covered Call Strategy

Why should you use a covered call strategy?

A covered call strategy can be initiated by simultaneously purchasing a stock and selling a call option. It
can also be used by someone who is holding a stock and wants to earn a regular income. Generally, the
call option which is sold/written will be of at-the-money or out-the-money strike price and it will not get
exercised unless the stock price increases above the strike price.

How should you use the covered call strategy?

Choosing between the ideal strikes involves a trade-off between priorities. An investor can select higher
out-the-money strike price and preserve some more upside potential. However, more out-the-money
would generate less premium income, which means that there would be a smaller downside protection in
case of stock decline. The expiration month reflects the time horizon of his market view.

Delivery Holdings in a stock & Sell call option


Strategy Existing Long in IDFC First Bank & Short IDFC First
Bank 60 CE
Expiry Date 26th August 2021
Market Outlook Sell on rise
Breakeven(Rs.) at expiry Stock price paid-premium received
Maximum Risk Stock price paid-call premium
Reward Limited
Margin required No – If one can pledge the stock holding

Let’s try to understand the Strategy:

IDFC First Bank Rs.49


Strike price Rs.60
Premium Received (per share) Rs.0.3-0.5
BEP (strike Price + Premium Received) Rs.60.4
Lot size (in units) 9500

Let us consider the following scenario: Mr. A has a delivery holding of 9500 shares of IDFC First Bank. Mr
A sells a ~22% out of the money call option with a strike price of Rs 60 for Rs.0.3-0.5. The upside profit
potential is limited to the premium received from the call option sold plus the difference between the
current market price of stock at the time of option writing and its strike price.

In the above example, if stock price surges above the 60 level, then the maximum profit would be
calculated as:(60-49+0.4)*9500 = (11.4*9500) = Rs 1,08,300. If the stock price stays at or below Rs.60,
the call option will not get exercised and Mr. A can retain the premium of Rs.3800 per lot, which is an extra
income. Mr. A can do the similar strategy every month to generate addition income on his stock holding.
IDFC First Bank Covered Call Strategy

For the ease of understanding, concepts such as commission, dividend, margin, tax and other transaction
charges have not been included in the above example.

Note: Investor who sold last Eight month’s covered call have reduced their cost of holding by ~6%

What to do if the stock price surge above the Call writing strike price?

As we are selling ~22 % OTM 2SD strike price, hence the probability of the stock expiring below the Call
writing strike price is approximately 95%. Since 2017, a similar strategy on IDFC First Bank has achieved a
strike rate of ~99%. However, there will be occasions when the Stock could breach the mentioned strike
price, in that case one must follow the following approaches.

1. Give the stock delivery & write the put option of 60 of the next series

2. Hold the stock & rollover the call writing positions to the next series

Payoff Schedule:

Note: The covered call strategy is best used when an investor wishes to generate income in addition to
any dividends from shares of stocks he or she owns. However, it may not be a very profitable strategy for
an investor whose main interest is to gain substantial profit and who wants to protect downside risk.
DISCLAIMER

Recommendation Parameters for Fundamental/Technical Reports:

Buy – Absolute return of over +10%


Accumulate – Absolute return between 0% to +10%
Reduce – Absolute return between 0% to -10%
Sell – Absolute return below -10%

Please refer to http://www.indiainfoline.com/research/disclaimer for recommendation parameter, analyst disclaimer and other disclosures.

Investments in securities market are subject to market risks, read all the related documents carefully before investing. There is no assurance or guarantee that the
investment objectives shall be achieved. IIFL does not guarantee any assured returns on the investments recommended herein. Past performance of securities/ i
nstruments is not indicative of their future performance. IIFL makes no representation/s or warranty/ies, express or implied, as to the accuracy, completeness or r
eliability of any information compiled herein, and hereby disclaims any liability with regard to the same, including, without limitation, any direct, indirect, incidental
or consequential loss. You shall verify the veracity of the information on your own before using the information provided in the document.Investors are requested t
o review the prospectus carefully and obtain expert professional advice. IIFL group, associate and subsidiary companies are engaged in providing various financial
services and for the said services (including the service for acquiring and sourcing the units of the fund) may earn fees or remuneration.

IIFL Group | IIFL Securities Ltd., IIFL House, Sun Infotech Park, Road No. 16V, Plot No. B-23, MIDC, Thane Industrial Area, Wagle Estate, Thane -
400604. CIN: 99999MH1996PLC132983 Tel.: (91-22)2580 6650. Customer Service: 40071000.Stock Broker SEBI Regn: INZ000164132. NSE:
10975 BSE: 179 MCX: 55995 NCDEX: 01249 Depository: INDP1852016. MF Distributor ARN: 47791. PMS SEBI Regn,: INP000002213. Investment
Adviser SEBI Regn. INA00000623. Research Analyst SEBI Regn: INH000000248. Loan products are offered by IIFL Finance Ltd. & IIFL Home
Finance Ltd. Kindly refer to www.indiainfoline.com for detailed disclaimer and risk factors.

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