Covered call question

With no dividends involved, with optimal strategy, only puts have the possibility of being desirable to exercise early.

If the stock pays a dividend, then it is sometimes optimal to exercise a call early too.

Excluding those situations, its usally better for the long to trade out instead of exercise early. Naturally as you approach expiration, the chances increase as the time value drops.

Finally, I dont think you can always be 100% certain that the guy on the other end knows "optimal strategy", so there is always a little risk there.

Just my opinion.

-Tony
 
Depending on your broker, if the options are ITM on option expiry date, you might see yourself long and short in the stock. Interactive broker will never do that. But I have had such cases in my Fidelity account. You have to call them and ask them to clear your long and short position. They do that to double charge you in the margin if you are using the margin.
 
What's the feedback on this strategy.

I swing trade stocks and use pre-determined stops and profit targets. I don't hold for big moves, but go for higher turnover instead. Most trades are 2-5 days and 2-4% profit targets. About 60% of the trades are winners.

What would be the downside of selling covered calls on my longs at the stike that is closest to my profit target? I would still stop out of the 40% losers and be called away on the winners where I was going to exit anyway. Except I collect extra premium on 100% of the trades.

As I was reading this thread, this idea just jumped out at me. It sounds too simple (like most options strategies do when I first read about them).
 
Hmm. Would you close out the option position when you closed out your position in the underlying ? I'm assuming you would, since I doubt you want to sit on naked options.

The key greek to look at here, in my opinion, would be your theta. Not sure if you're familiar with the greeks, so I'll define it just to be safe.

Theta is your "time decay" on the option. Since you're short the options, you benefit from theta.

Some sample numbers off ivolatility.com:

Lets say you bought 100 IBM today at $75 and wrote a covered call(strike $75) against it for $1.17 per share. Theta comes out to -.0425, with 14 days remaining in the option. If you held the stock for 5 days, you could expect that all else being equal, the time decay would be -.0425*5 = .2125.

If all other things remained constant, you could buy the option back for ~$0.96 cents when you closed out your position.

Some final thoughts:

* In actuality, theta is greatest at the end of an options life. It would likely increase a little each day if the options were close to expiration, so you might make a little more.

* Since you're short the option, you're short volatility. If vol spiked, it could wipe out the profit you were able to make off the theta.

*You probably wont get called away on stocks unless you hold the options to expiration. If you dont hold the options, you'll just have to trade out of the positon. You can use delta and gamma to estimate how much it will cost you to trade out if the stock appreciates/depreciates.

Hopefully this answers some of your questions.

Good Luck !

-Tony
 
Quote from lescor:

What's the feedback on this strategy.

I swing trade stocks and use pre-determined stops and profit targets. I don't hold for big moves, but go for higher turnover instead. Most trades are 2-5 days and 2-4% profit targets. About 60% of the trades are winners.

What would be the downside of selling covered calls on my longs at the strike that is closest to my profit target? I would still stop out of the 40% losers and be called away on the winners where I was going to exit anyway. Except I collect extra premium on 100% of the trades.

As I was reading this thread, this idea just jumped out at me. It sounds too simple (like most options strategies do when I first read about them).
More...

Tony described it in the above post as I was typing this response. If I understand you correctly; you buy the stock at 90, your stop is 2 to 4 percent, the same as your profit target? You sell the May 90 call for 1.70, you have to hold stock until expiration to deliver the stock if above 90 by .25. If it is above that you can't participate in the run up because you are short the 90 call, if it is below 90 by 2/4 percent, your stop, you sell the stock and you have to buy back the 90 call you are short giving up the spread and commissions. Not to bad at expiration because the time decay was working for you, however on a 2/5 day holding period it would add to your loss verses just plain trading the stock.

Had you bought the stock at 88 and it went to 90 you can turn it into a conversion(long stock, long put, short call, a guaranteed profit) because the call is sold for 1.70 and the 90 put costs you 1.70. Your $88 stock is sold for $90 if the stock is above 90.25 or below 89.75(your short calls are assigned above 90.25 or you exercise your put anywhere below 90).

Is it really worth it? Maybe just continue what you have been doing.
 
You must log in or register to reply here.
Back
Top