Option Strategies
Covered Call
Introduction
A Covered Call consists of a long position in a stock and a short position in call Options for the same amount of stock. Covered calls aim to profit from the Option premium by selling calls written on the stock you already own. At any time for American Options or at expiration for European Options, if the stock moves below the strike price, you keep the premium and still maintain the underlying Equity position. If the underlying price moves above the strike, the Option buyer can exercise the Options contract, which means you sell your stock at the strike price and keep the premium. Another risk of a covered call comes from the long stock position, which can drop in value.
Implementation
Follow these steps to implement the covered call strategy:
- In the
initialize
method, set the start date, end date, starting cash, and Options universe. - In the
on_data
method, select the Option contract. - In the
on_data
method, place the orders.
def initialize(self) -> None: self.set_start_date(2014, 1, 1) self.set_end_date(2014, 3, 1) self.set_cash(100000) self.universe_settings.asynchronous = True option = self.add_option("IBM") self._symbol = option.symbol option.set_filter(lambda universe: universe.include_weeklys().naked_call(30, 0))
The naked_call
filter narrows the universe down to just the one contract you need to form a covered call.
def on_data(self, slice: Slice) -> None: if self.portfolio.invested: return chain = slice.option_chains.get(self._symbol) if not chain: return # Find ATM call with the farthest expiry expiry = max([x.expiry for x in chain]) call_contracts = sorted([x for x in chain if x.right == OptionRight.CALL and x.expiry == expiry], key=lambda x: abs(chain.underlying.price - x.strike)) if not call_contracts: return atm_call = call_contracts[0]
Approach A: Call the OptionStrategies.covered_call
method with the details of each leg and then pass the result to the buy
method.
covered_call = OptionStrategies.covered_call(self._symbol, atm_call.strike, expiry) self.buy(covered_call, 1)
Approach B: Create a list of Leg
objects and then call the combo_market_order, combo_limit_order, or combo_leg_limit_order method.
legs = [ Leg.create(atm_call.symbol, -1), Leg.create(chain.underlying.symbol, chain.underlying.symbol_properties.contract_multiplier) ] self.combo_market_order(legs, 1)
Strategy Payoff
The payoff of the strategy is
CKT=(ST−K)+PT=(ST−S0+CK0−CKT)×m−fee whereCKT=Call value at time TST=Underlying asset price at time TK=Call strike pricePT=Payout total at time TS0=Underlying asset price when the trade openedCK0=Call price when the trade opened (credit received)m=Contract multiplierT=Time of expirationThe following chart shows the payoff at expiration:

The maximum profit is K−ST+CK0, which occurs when the underlying price is at or above the strike price of the call at expiration.
The maximum loss is S0−CK0, which ocurrs when the underlying price drops.
If the Option is American Option, there is a risk of early assignment on the contract you sell.
Example
The following table shows the price details of the assets in the algorithm:
Asset | Price ($) | Strike ($) |
---|---|---|
Call | 3.35 | 185.00 |
Underlying Equity at start of the trade | 187.07 | - |
Underlying Equity at expiration | 190.01 | - |
Therefore, the payoff is
CKT=(ST−K)+=(190.01−185)+=5.01PT=(ST−S0+CK0−CKT)×m−fee=(190.01−187.07+3.35−5.01)×m−fee=1.28×100−2=126So, the strategy gains $126.
The following algorithm implements a covered call strategy:
class CoveredCallAlgorithm(QCAlgorithm): def initialize(self) -> None: self.set_start_date(2014, 1, 1) self.set_end_date(2014, 3, 1) self.set_cash(100000) option = self.add_option("IBM") self.symbol = option.symbol option.set_filter(lambda universe: universe.include_weeklys().naked_call(30, 0)) self.call = None # use the underlying equity as the benchmark self.set_benchmark(self.symbol.underlying) def on_data(self, slice: Slice) -> None: if self.call and self.portfolio[self.call].invested: return chain = slice.option_chains.get(self.symbol) if not chain: return # Find ATM call with the farthest expiry expiry = max([x.expiry for x in chain]) call_contracts = sorted([x for x in chain if x.right == OptionRight.CALL and x.expiry == expiry], key=lambda x: abs(chain.underlying.price - x.strike)) if not call_contracts: return atm_call = call_contracts[0] covered_call = OptionStrategies.covered_call(self.symbol, atm_call.strike, expiry) self.buy(covered_call, 1) self.call = atm_call.symbol