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NISM Certifications · NISM-Series-VIII: Equity Derivatives · Strategies using Equity Futures and Equity Options

An investor owns shares of a company and sells a call option on the same shares, with the number of shares matching the option lot. What is this strategy called, and what is its main risk?

This is a covered call. The investor holds the shares and sells a call, earning the premium but giving up gains above the strike price, so upside is capped at strike plus premium while the downside on the shares remains.

  1. AProtective put; the premium paid is lost if prices rise
  2. BCovered call; the upside on the shares is capped at the strike plus premium receivedCorrect
  3. CLong straddle; loss if prices stay flat
  4. DBear put spread; limited profit on a fall

Explanation

Holding the underlying and writing a call is a covered call. The premium gives some cushion, but if the price rises above the strike the call is exercised against the holder, so gains are capped at strike plus premium. Downside from the shares remains.

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