In an interesting session as a part of the highly popular Face2Face series, conducted by Elearnmarkets, Mr Vivek Bajaj, Co-founder of Elearnmarkets, invited Mr Vineet Jainn, a successful options trader, to decode his Covered Call Options Strategy.
Mr Vineet Jainn is from Ludhiana and started investing in the year 1989. Mr Vineet Jainn, Chief Investment Officer of Volvin Limited, introduces India’s first AIF, Volvin Growth Fund – Active Rabbit, focusing on the Covered Call Strategy.
With over 30 years of experience in equity markets, he aims to demonstrate that higher returns can be achieved with lower risk. He has introduced the first-ever all-India stock market competition for top colleges and B-schools and believes in value investing and compounding.
In today’s blog, let us discuss how to create wealth using the covered call options strategy:
Table of Contents
The Power of Compounding for Wealth Creation
If the chart below depicts your investment journey then we can see that from 1-5 years there will be substantial losses but from the 6th year, your portfolio will start making profits.
This is the benefit of compounding and investing for the long term. After 5 years there is negligible probability that any investor in the stock market can lose money.
In the past, long-term investments—like equities and equity mutual funds—have yielded larger returns than short-term ones. They provide the possibility of increased income and capital appreciation, particularly in times of economic expansion.
Investing for the long term reduces the effects of volatile and short-term market swings. The impact of daily market fluctuations is lessened over an extended period of time when market ups and downs tend to average out.
Emotions and short-term market noise typically have less of an impact on long-term investors. They are more likely to adhere to their investment plan and refrain from making snap judgments in response to changes in the market.
After understanding how an investor can create wealth in the long term, let us discuss how he can create wealth using a covered call strategy-
What is the Covered Call Options Strategy?
Mr Vineet Jainn explains this strategy with the help of examples of Thrill Seekers and Casino-
A covered call is a two-part strategy where calls are sold on a share-for-share basis and stock is bought or owned.
The process of simultaneously purchasing shares and selling calls is referred to as “buy write.” The process of selling calls against previously acquired stock is referred to as “overwrite.”
Purchasing 500 shares of stock and simultaneously selling 5 call options is an example of a buy write.
When a shareholder decides to sell five calls against their 500 shares after holding them for a while, that is an example of an “overwrite.”
The position that results is known as a “covered call position,” regardless of whether the shares are bought concurrently with the calls or before they are sold.
The covered Call or CC strategy is the only strategy that creates money/ alpha even in stagnant or uncertain markets.
One may retain the premium that is obtained by selling a covered call as revenue. For this reason, a lot of investors employ covered calls and run a program where they sell covered calls on a regular basis (sometimes quarterly, sometimes monthly) in an attempt to increase their annual returns by a few percentage points.
In this strategy, Mr Vineet Jainn, pledges the share his buy and sell call options at the ATM. For example he buys BHEL stock at Rs.120.7 then he sells the call option of the strike price of Rs. 120 as shown below-
You can watch the full Face2Face Video here-
Market circumstances ranging from neutral to bullish are ideal for covered call writing. Profit potential is constrained on the upside, and stock ownership below the breakeven point carries the entire risk on the downside.