Covered Call Solutions Sought

J

jwcapital

Ran into an interesting question from a colleague. He currently has a ratio covered call going (4 long underlyings and 5 short calls). All calls are for the current period (Aug). The calls are deep ITM. He trades the ES (S&P emini) like I do. He is long at 972 and the short strike is 970. He received 25 points for each call. Without having to exit one of the calls to be "covered," what are his options to stay synthetically covered?

I didn't really have an answer for him, for I have never come across this situation. I toyed with the following idea: sell a put at the latest support level, which happens to be at 995. The premium amount was 16 for the 995P. If the underlying finished between the put strike and the call strike, he will lock in a small profit of 16. If the underlying finishes at 1011, then he keeps the premium and has a loss of 41 points on the assignment (assuming he covers the 970C on the close on expiration Friday. Net loss is 25 points). Now suppose the underlying surpassed the 1010 level (which, on a technical basis is very possible). My thought was to roll up the short put as the break-even point is surpassed, and keep doing this until expiration. I appreciate any thoughts, for my buddy and I am really stumped.
 
Quote from jwcapital:

Without having to exit one of the calls to be "covered," what are his options to stay synthetically covered?

I didn't really have an answer for him,
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He is currently covered on four calls.

He is uncovered on one.

I know you know that. But, he cannot 'stay' synthetically covered because he is not covered now.


Here is his current position

Short one 970 call
Short 4 970 puts (synthetically)

There are many ways to manage that position. Don't make it more complicated that that. That is his position.

Mark
 
Over writes are a good way to pick up some premium, to a point. Once the underlying gets somehwhat ITM, generally, it's not a good idea to try to defend the position, particularly once the delta of the short calls exceeds that of the underlying. Once that point is reached, I'd look seriously at either covering the short leg or closing the position since any add'l upside is a give back.

If he expects or sees a reversal, I'd take a look at booking the profit on the underlying and converting to a 5x5 bearish call spread. I am not familiar with the ES or its numbers so it's merely a generic suggestion.
 
Quote from jwcapital:

Ran into an interesting question from a colleague. He currently has a ratio covered call going (4 long underlyings and 5 short calls). All calls are for the current period (Aug). The calls are deep ITM. He trades the ES (S&P emini) like I do. He is long at 972 and the short strike is 970. He received 25 points for each call. Without having to exit one of the calls to be "covered," what are his options to stay synthetically covered?

I didn't really have an answer for him, for I have never come across this situation. I toyed with the following idea: sell a put at the latest support level, which happens to be at 995. The premium amount was 16 for the 995P. If the underlying finished between the put strike and the call strike, he will lock in a small profit of 16. If the underlying finishes at 1011, then he keeps the premium and has a loss of 41 points on the assignment (assuming he covers the 970C on the close on expiration Friday. Net loss is 25 points). Now suppose the underlying surpassed the 1010 level (which, on a technical basis is very possible). My thought was to roll up the short put as the break-even point is surpassed, and keep doing this until expiration. I appreciate any thoughts, for my buddy and I am really stumped.
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Here is what he did: Bought back the 970C and placed two covered calls at 995. Now he has 6 longs and 6 shorts.
 
Quote from jwcapital:

Here is what he did: Bought back the 970C and placed two covered calls at 995. Now he has 6 longs and 6 shorts.
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In other words, he bought one call and sold two puts at these levels.

It may work great, but I don't like the risk reward. This is a straight bullish play - in an attempt to fix a positon that he let get away from him.

Mark
 
It really depends on his market view.

If he is a little worried and just wants to neutralize his position, selling ONE DITM AUG put will do.



Thanks,
 
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