Buying after a rise confidently with covered call & more

A bull market can be defined much more easily with performance. How about an index that has not fallen year over year in over 8 years? Even better, an index that is already up 16% after starting the year at a life high. That is Nifty for you. If these rising numbers make you nervous then you are not alone.

Most of us traders would like to take a bullish trade even after a significant rise but with the same confidence of buying at the lower levels.

Continuing rallies are very rewarding, but a pullback in between could be equally or even more punishing. The best way to take care of a situation like this is to change the way we take a bullish trade after a significant rise.

The change is Covered Call & More. We will learn what “& More” is but a Covered Call is a trade where we go Long (Buy Position) in the Underlying Cash/ Preferably Future and at the same time Sell (Short) Call with a Strike Price closer to the Target Price.

Whenever we already have a move in place and we are betting on continuation, there are 2 risks that we need to be worried about. One is Price correction, and another is Time correction. Covered Call checks both boxes.

With a Sell Position in a Call, if the underlying goes lower, we make up part of our losses in the Underlying Future from a fall in Call premium (which we sold). On the other hand, if the underlying takes a few days before giving us the move, the passage of time creates profit in Call (reduction in Premium due to passage of time).

But Profits are limited to the difference between Call Strike Price and Underlying Buy Price + Premium Received. Now on the day of expiry, this is not much of a pain because we were going to exit the stock at the target price. However, if the Target Price comes before expiry we will get much less profit. Due to the rise in underlying there will be Losses in Calls sold.

Let us face it, we are not expecting the underlying to rocket past our target any time soon because there is already a move in place.

& More: We use the money received by selling the Call option to Buy a Put option of lower strike. Typically, the last breakout point. Example: For Nifty I would buy a put of 25000 (Struggle since July to clear).

Now the exit strategy. Treat this like a regular Futures trade and keep and observe the stop loss. Here, the profits will be lower upon a good run due to Sell Call & Buy Put positions losing small amounts. The only good part is in case we end up hitting stop loss, we would be making money in both options.

This strategy is also known as a collar. But I feel it is easier understood as a traditional Covered Call & More that helps trade rise after rising with confidence.