Tiger Trade

A Covered Call involves holding a stock position and simultaneously selling a call option on the same stock. This strategy is designed to generate additional income through option premiums while setting a predetermined exit level for profit-taking.

Why Use It: Earn extra income while holding your stock. But, your profit is capped if the stock price rises too much.

How To Do It：

• Hold 100 shares of the underlying stock

• Sell 1 out-of-the-money (OTM) call option (strike price typically 5–10% above the current market price)

Example:

Hold 100 shares of Stock A, Current Price: $200

Action: Sell 1 August expiry call option with a $220 strike price for a $5 premium per share

→ Premium received: $500

At Expiry:

• If price ≥ $220: Stock is called away at $220. Profit = stock gain + $500 premium

• If price < $220: Option expires worthless; investor retains shares and the $500 premium

✅ Pros:

• Premium income

• Low risk, no extra margin

• Good in flat/modestly rising markets

❌ Cons:

• Capped upside

• Limited downside protection

• Early assignment risk if deep ITM or before ex-div

Tips:

• Select a strike price aligned with your target exit level

• This strategy does not provide full downside protection if the stock declines sharply

When investors hold stocks with unrealized gains but worry about near-term downside risk, they can buy Protective Put options. This strategy acts like insurance—if the stock drops below the strike price, the investor can sell the stock at the predetermined level to protect gains or limit losses.

Why Use It: Locks in a minimum exit price if the market turns, while keeping upside open for paying a premium.

How To Do It：

• Hold 100 shares of the underlying stock

• Buy 1 out-of-the-money (OTM) put option (strike price typically 5–10% below the current price, but above cost basis)

Example:

Hold 100 shares of Stock A, with a cost basis of $160.

Action: Buy 1 put option with a $185 strike price, expiring end of August, paying $4 per share in premium.

→ Pay total $400 as “insurance”

At Expiry:

• If stock > $185: The option expires worthless, and investor continue holding the stock.

• If stock ≤ $185: The option is exercised, and investor sell the shares at $185, locking in gains.

✅ Pros:

• Strong downside protection

• Upside remains open

• Good for volatile markets

❌ Cons:

• Premium cost

• Protection expires

Tips:

• Protective puts cost money (the premium), which increases total holding cost.

A Collar combines the benefits of a Covered Call and a Protective Put. You sell a covered call to collect premium, and use that income to pay for a protective put, creating a low-cost or zero-cost hedge. All contracts must share the same expiration and underlying quantity.

Why Use It: Sell a call and buy a put simultaneously while holding the stock. Balance downside protection with reduced or zero cost.

How To Do It：

• Hold 100 shares of the underlying stock

• Sell 1 OTM call and buy 1 OTM put (same expiry, same quantity)

• Strike relationship: Call strike > current price > Put strike

Example:

Hold 100 shares of Stock A, Current Price: $200

Action: Sell 1 call with a $220 strike for $5/share → collect $500

Buy 1 put with a $185 strike for $4/share → pay $400

→ Net credit: $100

At Expiry:

• If $185 ≤ stock ≤ $220: Both options expire worthless, you continue holding the stock.

• If stock ≥ $220: The call is exercised, and shares are sold at $220.

• If stock ≤ $185: The put is exercised, and shares are sold at $185.

✅ Pros:

• Defined risk/reward

• May cost little or nothing

• Useful for locking in gains

❌ Cons:

• Limited upside

• Only lasts until expiry

• Early call assignment possible

Tips:

• While this strategy provides downside protection, it caps upside gains at the call’s strike price.