realize that, as the time value of your written calls bleeds away, and the next ex-dividend date approaches -- your stock may get called away before you get the dividend. did you consider that? you never want to write deeply itm calls against dividend-paying stock unless the time value of the calls exceeds the dividends you expect to receive and the carrying costs of the position. monitor your position and as soon as the calls you wrote go to parity, buy them back (or take other defensive action) else you will definitely lose your stock.
Deep ITM covered call
- Thread starter dojibear
- Start date
Doji...
I write ITM calls frequently usually with existing positions with a view to buying them back. I do this in my RRSP as well. I usually look for stocks with the best premiums but the MM on the ME make any option trading on Canadian shares terribly difficult.
I'm long lots of Gold stocks in particular Kinross and Goldcorp. They don't have the premiums that they had a few months ago, but their still decent. I see my call writing activities as a slow compounding of my retirement money--obviously its not going to appeal to the day trader in you but for the money you take off the table....
P.S. Why GE?
I write ITM calls frequently usually with existing positions with a view to buying them back. I do this in my RRSP as well. I usually look for stocks with the best premiums but the MM on the ME make any option trading on Canadian shares terribly difficult.
I'm long lots of Gold stocks in particular Kinross and Goldcorp. They don't have the premiums that they had a few months ago, but their still decent. I see my call writing activities as a slow compounding of my retirement money--obviously its not going to appeal to the day trader in you but for the money you take off the table....
P.S. Why GE?
Kaya,
As you said, the Canadian option market is really bad for volume and price. I am long a few Canadian stocks, and couldn't find any good covered calls to make, be that there are no option contract available, or the premium sucks.
Why GE? well, I already have some GE, have been following it, and want to try it with a portion of the portfolio, I call it 'risk management'
And in the worst case scenario, if GE dropped to my break even point, around 26$ (for this particular covered call trade), I'll have to re-evaluate if GE could still make light bulbs (and if David Letterman still makes fun of them) to decide to cover my short calls and sell the stocks, or to keep it.
I don't mind if the shares get called.
Thanks all for your interest.
Cheers!!
As you said, the Canadian option market is really bad for volume and price. I am long a few Canadian stocks, and couldn't find any good covered calls to make, be that there are no option contract available, or the premium sucks.
Why GE? well, I already have some GE, have been following it, and want to try it with a portion of the portfolio, I call it 'risk management'
And in the worst case scenario, if GE dropped to my break even point, around 26$ (for this particular covered call trade), I'll have to re-evaluate if GE could still make light bulbs (and if David Letterman still makes fun of them) to decide to cover my short calls and sell the stocks, or to keep it.
I don't mind if the shares get called.
Thanks all for your interest.
Cheers!!
One little risk that I haven't seen mentioned here:
If the price of GE drops to a point where you decide to get out, you have to cover your short call position first. Unfortunately, it won't have dropped as fast as the underlying (due to remaining time value). You will have to take a loss to get out of the whole position.
Been there, done that...
If the price of GE drops to a point where you decide to get out, you have to cover your short call position first. Unfortunately, it won't have dropped as fast as the underlying (due to remaining time value). You will have to take a loss to get out of the whole position.
Been there, done that...
Quote from dojibear:
Thanks for all the inputs.
vhehn, I'll look into your spread. thx for the suggestion.
I got in GE @ 29.19, and with some experience in daytrading, and useless risky exposure, I sold my covered calls @ 3.10, locking in 10.6% profit for now... untill the worst case scenario happens
If the Spoos broke resistance and rocketed away, you guys will be able to go to wine and cheese parties, while I'll stay home with my beers and a bag of chips.
Cheers !!
How do you figure 10.6%?...if the stock gets called away,you are selling it for 27.50 plus the 3.10 premium.So your total proceeds for tax purposes are 30.60.You paid 29.19 for the stock.
30.60-29.19=1.41
1.41/29.19=4.83% return,not 10.6%.
I would have sold the GE June 30 calls for .90.
You left one thing out of your equation...
When you hit your stoploss point at 26.35, you will lose $, period. You won't make $ due to theta decrease. You will lose less money than holding only stock, but you will lose money. It will cost you more than zero to buy back your call. Whatever this amount is (and there's a possibility it could even be more than what you paid if volatility picks up), that is your real risk.
4.5 months is a long time... a 9.8% move in a stock (from 29.20 to 26.35) over 90+ trading days is well within reason.
