Obviously I have very little experience with cc's. I've read a little but I figured I'd try to get some input from actual traders, which I'm glad I did, and the input is much appreciated. I've been trying to get a feel for cc's using my IB sim account, but that is not useful as I found out later when told by an IB CSR in a chat that options will not be exercised in a sim account. He also told me "if you are short an option you may be assigned at any time" (direct quote). That was basically the main reason for my initial question here.
Covered Calls Questions
- Thread starter tomahawk
- Start date
Obviously I have very little experience with cc's. I've read a little but I figured I'd try to get some input from actual traders, which I'm glad I did, and the input is much appreciated. I've been trying to get a feel for cc's using my IB sim account, but that is not useful as I found out later when told by an IB CSR in a chat that options will not be exercised in a sim account. He also told me "if you are short an option you may be assigned at any time" (direct quote). That was basically the main reason for my initial question here.
Perhaps many who use covered calls during a bullish or sideways market are doing so because we find them less scary than holding "naked stock."
With that philosophy in mind, one approach (and this is only one approach) is to look at the remaining time value of the option. The time value is the only part of the option premium that you will get to keep, anyway. So I ask myself whether the risk of the position (that is, the risk that the underlying could decline) is justified by the remaining time value.
There are three situations in which time value could be so small as to not be worth taking further risk for.
1) you are very close to expiration
2) the underlying has risen so much that the option is now fairly deep in the money, and nearly all the value of the option is intrinsic value. There is little more to be gained by holding the position
3) the underlying has fallen so much that the option is now fairly deep out of the money--at this point you might already be planning to dump the whole position, anyway, since you may be losing money on the overall position in this instance
I speak here only of the difference between the underlying price and the strike price; clearly, there could also be numerous fundamental reasons why you might choose to exit.
I hope this makes sense.
With that philosophy in mind, one approach (and this is only one approach) is to look at the remaining time value of the option. The time value is the only part of the option premium that you will get to keep, anyway. So I ask myself whether the risk of the position (that is, the risk that the underlying could decline) is justified by the remaining time value.
There are three situations in which time value could be so small as to not be worth taking further risk for.
1) you are very close to expiration
2) the underlying has risen so much that the option is now fairly deep in the money, and nearly all the value of the option is intrinsic value. There is little more to be gained by holding the position
3) the underlying has fallen so much that the option is now fairly deep out of the money--at this point you might already be planning to dump the whole position, anyway, since you may be losing money on the overall position in this instance
I speak here only of the difference between the underlying price and the strike price; clearly, there could also be numerous fundamental reasons why you might choose to exit.
I hope this makes sense.
If the option is deeply in the money,
you could also then buy a put to lock in your gain, or sell the stock and buy the option assuming you don't have to overpay to get out of the trade.
you could also then buy a put to lock in your gain, or sell the stock and buy the option assuming you don't have to overpay to get out of the trade.
But you do have to overpay to get out. There are few sellers of DITM clls at a reasonable price.
This is the #1 reason that selling naked puts is significantly better than writing covered calls. When you have a big win, you can grab that put for a nickel or dime and exit the trade.
Mark
http://blog.mdwoptions.com
#2 reason is add'l slippage and commissions with CC.
But if in a deep ITM CC, place a combo order to close 5 maybe 10 cts above parity. Sometimes you get lucky.
And the previous idea of buying a put to lock in gain is functional but can have even more slippage and commissions and can introduce pin risk (slim chance but possible).