Deep ITM Covered Calls Question

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Sup3r Hanz

1.] With a large cap / high liquidity stock, if the option is >15% in the money (30 day contract) what typical probability is there of being assigned in under 7 days and therefore a losing a lot of the downside protection?

2.] What happens If I can’t close my position, i.e. not enough OI/Vol before expiry and I cannot buy/close my position and it gets held past expiry? Will a market maker automatically fill my order, and if so, am I likely to get a bad price and it eliminates any profit or even puts me at a loss?
 
1) Your chances of being assigned early on a call is very low, except in certain circumstances such as an upcoming dividend or the stock being hard to borrow. If this happened you wouldn't lose your downside protection, you would actually have no downside risk at all, as you would no longer have your stock or you would now be short stock.

2) You would always be able to close your position, no matter what the OI/Vol is (except if you were trying to sell an option that is worthless and has no bid). This is what Market Makers do. They make markets. They want to buy your option, this is how they make money. You may not necessarily like their price, but you will be able to close your position.
 
1-If there's any meaningful premium in the option it's not very likely to get exercised. Look at the AAPL options below (Jan.21). Above the line would be candidates for exercise early. Below not very likely. There's a gray area above/below the line though. Line could actually be a bit higher.

2-If you hold your position past expiration and it's ITM, the broker will exercise it for you and remove the shares you own (covered call position).

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2-If you hold your position past expiration and it's ITM, the broker will exercise it for you and remove the shares you own (covered call position).

If you hold a covered call after expiration (this means you are short the call), and it ends up in the money, your broker can't exercise it for you. Exercise is done by the owner of the call. You most likely will be assigned, but not necessarily. There is always a chance the owner files a do not exercise notice. Your own broker has nothing to do with this.
 
FSU said:
2-If you hold your position past expiration and it's ITM, the broker will exercise it for you and remove the shares you own (covered call position).

If you hold a covered call after expiration (this means you are short the call), and it ends up in the money, your broker can't exercise it for you. Exercise is done by the owner of the call. You most likely will be assigned, but not necessarily. There is always a chance the owner files a do not exercise notice. Your own broker has nothing to do with this.
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I would have thought I would just receive the full credit, If I was a buyer of a contract, then I heard it's much more likely to automatically assigned in expiration.

BKR88 said:
1-If there's any meaningful premium in the option it's not very likely to get exercised. Look at the AAPL options below (Jan.21). Above the line would be candidates for exercise early. Below not very likely. There's a gray area above/below the line though. Line could actually be a bit higher.

2-If you hold your position past expiration and it's ITM, the broker will exercise it for you and remove the shares you own (covered call position).

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That would be about max 16.6% ITM, would you say that is a good rule of thumb then? It's hard to understand when something becomes meaningful premium. I would have thought brokerage software would tell you the probability of you being assigned.
 
Sup3r Hanz said:
That would be about max 16.6% ITM, would you say that is a good rule of thumb then?
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It's going to depend upon how much time is left before expiration.
Those options had less than 30 days to expiration.
Every day closer to expiration will move the line closer to the current stock price.
So in a couple weeks the 16% might be down to 10%.
Calculate the premium. If no premium then it could get exercised.

***With regards to exercise against you, there's nearly a 100% chance of getting a short DITM call exercised against you if held till expiration. It's nothing to worry about though as you're long the stock so will be selling your stock to cover the exercise.
 
BKR88 said:
***With regards to exercise against you, there's nearly a 100% chance of getting a short DITM call exercised against you if held till expiration. It's nothing to worry about though as you're long the stock so will be selling your stock to cover the exercise.
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Yeah, and if I'm doing this as a buy-write, rather than "investing" in the company for the long term and using a CC as a temporary hedge/protection, this is actually the best/easiest scenario - leaving it into expiry?
 
Sup3r Hanz said:
Yeah, and if I'm doing this as a buy-write, rather than "investing" in the company for the long term and using a CC as a temporary hedge/protection, this is actually the best/easiest scenario - leaving it into expiry?
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If you feel the price will stay above the call strike price you sold, then hold it into expiration and your stock will be sold at the price of the strike you sold. Your stock & call will be gone the day after expiration. Your positions will both be gone if the position is exercised early by the long holder of the call. Just gets you out of your positions sooner than expiration date.
 
A deep ITM covered call will always get called away when someone owns them at 15% ITM. Makes no sense -your only gain comes from extrinsic value
 
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