Covered Call in Bajaj Finance causes opportunity loss of Rs. 28 Lakh as stock turns super bullish

The Covered Call options strategy is supposed to be a relatively safe strategy. However, deploying it in stocks which are aggressively bullish can lead to disastrous consequences. An investor-trader deployed the strategy in Bajaj Finance and suffered a massive opportunity loss of Rs. 28 lakhs

The Covered Call Options strategy is supposed to be deployed only in placid stocks with subdued movements in the price. However, the problem is that even placid stocks can become bullish.

ITC is a textbook example of this. The stock had become the subject of memes owing to its lack of movement despite the entire market being bullish. However, this changed almost overnight. The stock is up almost 50% on a YoY basis.

In any event, selling calls on stocks like Bajaj Finance which are aggressively bullish is fraught with danger.

In June 2022, the markets were in a very bad shape. Bajaj Finance had plunged below Rs. 5800. An investor sold 2000 Calls of the strike price of Rs. 5800 on the July expiry, confident that the stock would stay subdued and hover around that strike price.

However, the markets turned bullish all of a sudden. Also, Bajaj Finance reported stellar results. The stock surged like a rocket and closed at Rs. 7200, up a mammoth Rs. 1400 or 24% from the strike price of Rs. 5800.



Obviously, there is nothing that can be done in such circumstances other than to meekly give delivery and shed quiet tears.

The opportunity loss of Rs. 1400 per share amounts to a loss of Rs. 28 lakh on the holding of 2000 shares. The actual loss on the day of expiry was Rs. 23 lakh after deducting the premium received.

Of course, the investor-trader did try to mitigate the loss by selling Puts on the stock. However, there is a limit to how much mitigation is possible given the constraints of capital and the grave risk of a reversal in the stock price.



To make matters worse, the stock has been upgraded by JP Morgan to a target price of Rs. 8500.