3rd December 2010, 07:20 PM
Join Date: Oct 2010
Rep Power: 7
Covered Call Writing on RIL
My Father has around 150 shares of RIL bought at an average price of Rs.940/-.
I observe that the stock has little momentum and it has been facing resistance at high levels. Overall, it is in a tight range.
I was contemplating writing covered call option of RIL at-the-money on a monthly basis. At-the-money writing will generate 3.5-4% or Rs.35-40 on RIL underlying.
The reason behind writing covered call strategy is two-fold i.e.,
1. I can get assured return of 3-4% every month.
2. In case of downfall, I can reduce the cost of holding RIL shares, because I get to keep the premium on call option.
I do face upside risk in writing call option strategy. But, that is taken care by the Long positions in Cash market.
One lot of RIL equals to 250 shares.
I've 150 shares of RIL in cash segment.
In order to employ covered call writing strategy, I need buy 100 more additional shares of RIL, which I will do shortly.
For buying a call option, only payment of premium is required.
For selling a call option, SPAN margin is applicable.
Now, my query is, If I employ covered call strategy (which is nothing but selling call option in the presence of underlying shares in cash market), DO I HAVE TO MAINTAIN SPAN MARGIN? OR CAN I SELL CALL OPTION WITH ZERO BALANCE IN MY A/c i.e., NO SPAN MARGIN.
Moreover, on call writing, will I receive the premium amount on the transaction day or on the expiry day.