Quote from c7b:
rew,
but if it's a covered deep-in-the money call, there won't be a 250 loss because it is covered with the stock in hand. So, i should be receiving 520 premium plus the strike price. Isn't this right?
Thanks.
piezoe,
please explain, and thanks.
The market sucks today, with a bad risk to reward ratio. I have time to respond, but there are people here much better qualified to advise you than I..
My comment related specifically to the original post in which it was proposed to buy stock and sell a deep in the money, far out call against it. This is a terrible strategy, because the goal of selling a covered call is to sell as little intrinsic and as much extrinsic value as possible, with maximum decay rate of the extrinsic. The front month atm call satisfies these requirements best. Extrinsic is at a maximum and the intrinsic at a minimum for the atm call. You want to sell the front month because theta won't change much until you are about three weeks from expiration. Your goal is to sell extrinsic value and see it decay away as rapidly as possible due to theta becoming exponentially more positive as expiration is approached. You would never want to sell a call deep in the money and far out against long stock, because you would not see much increase in theta on the short call for several months, while in the meantime you have money at risk tied up in the stock, and stocks go down as well as up. But the most important reason why you would never do this, I hope, is that the deep in the money short call will have a delta of .8 to .9 and therefore maximizes the intrinsic and minimizes the extrinsic, which is just the opposite of what you want.
The other aspect to this is that you should limit this strategy to stocks that are in a slow upward grind. You want the stock to go up in value, not down. But go up slowly. In general, this is not a good strategy in a down market. If you do decide to sell a covered call, then please follow the stock price carefully. You would likely want to liquidate the position should the stock break below its trendline.
You should consider diagonals. Selling a diagonal is often a better strategy than selling a covered call. In a diagonal you sell the front month, atm call and buy a deep in the money (delta .8 to .9) call several months out for a stock that is in a slow upward grind. The ditm long call is a substitute for long stock , but ties up less capital than if you had bought the stock itself. If all goes well, the front month option you sold will expire worthless, atm, or barely in the money. (You have the ditm long call for protection should the stock really take off, but you still have to be on guard against the underlying tanking.) You can buy the sold call back, if you need to, once nearly all of its extrinsic value has decayed away. Then you keep the far out (several months, say three) ditm call, and sell the next, front month, atm call. Do this repeatedly, and you will do much better than if you had sold a back month atm option just once, and waited several months for its time value, i.e., its extrinsic value, to decay.
May i strongly recommend that you do a lot of reading about options before jumping into them. And then start slowly, one contract only, until you begin to show consistent profits. It important to have a good working knowledge of the Greeks before taking the plunge into options. Trading options without much understanding is a good way to lose a lot of money. Sadly, there is no such thing as a riskless option strategy.
I have always liked the little book on options published by the Financial Times as being especially well-written, but there are many good books to choose from. I would not recommend trying to read the more advanced books, such as Cottle's, until you have the basics down.
