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

Which view on the market is best suited to a trader who sells (writes) a covered call on shares already held?

A covered call suits a neutral to mildly bullish view. The writer collects premium on top of share holdings, but upside above the strike is given up, so it is not ideal for a big rally, a crash, or a high volatility expectation.

  1. AStrongly bullish with expectation of a large rally
  2. BStrongly bearish with expectation of a crash
  3. CNeutral to mildly bullish, aiming to earn premium incomeCorrect
  4. DExpecting very high volatility in either direction

Explanation

In a covered call the writer keeps the premium and the shares, but gains from the shares are capped at the strike plus premium. So it suits a flat or mildly rising market. A strong rally would be capped, and a crash would only be cushioned by the premium.

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