Deep-ITM covered calls

[dis]

Quote from ADLE:


If you can recommend any book that covers Deep-ITM covered calls, it would be great, I have no luck to find this one, people explain a lot about writing covered call slightly out of money, but not deep-itm :-(

It only makes sense to write a covered ITM call when one already owns the stock, expects it to decline to the strike, and does not want to sell the stock (perhaps because of tax considerations).

Buying a stock that one expects to decline (in your case, 25%) and writing a DITM call against it makes no sense.

 

[Buy1Sell2]

coverd call writing is one of the worst strategies one can employ. When options are written, they should always be written in , at the very least , a net zero position and not holding a long that can tank. I prefer always writing with a net credit and not holding a long that can tank.

 

[ra1]

Adle, I think you should pay very close attention to dis' and buy1sell2's comments.
Your strategy makes no sense. Writing a deep itm call means you have virtually no extrinsic value and are at high risk of early assignment and thus locking in a fat loss. By definition a deep itm call has a much lower strike price than the price you paid to purchase the stock in the first place (I'm assuming you are doing a buy-write). So, in short you are planning to buy a stock for ,say, $50 and then be assigned at, say, $20, taking a $30 loss! Your example of buying stock at $30 and selling a 30 strike call is not deep itm, it's atm. I think you have a lot of learning ahead of you, beginning with definitions. I suggest you start reading - have a look at some of the other posts covering recommended reading. Finally, the reason you can't find anything on deep itm written calls in books is because it doesn't make sense (except for the example given by dis and even then it's stretching it a bit).
ra1

 

[ADLE]

2 ra1:
What do you think about this article:
http://www.smartoptionsreport.com/Archives/2005/20050131.html

Still does not make sense?

 

[zdreg]

Quote from ra1:

Adle, I think you should pay very close attention to dis' and buy1sell2's comments.
Your strategy makes no sense. Writing a deep itm call means you have virtually no extrinsic value and are at high risk of early assignment and thus locking in a fat loss. By definition a deep itm call has a much lower strike price than the price you paid to purchase the stock in the first place (I'm assuming you are doing a buy-write). So, in short you are planning to buy a stock for ,say, $50 and then be assigned at, say, $20, taking a $30 loss! Your example of buying stock at $30 and selling a 30 strike call is not deep itm, it's atm. I think you have a lot of learning ahead of you, beginning with definitions. I suggest you start reading - have a look at some of the other posts covering recommended reading. Finally, the reason you can't find anything on deep itm written calls in books is because it doesn't make sense (except for the example given by dis and even then it's stretching it a bit).
ra1

there is no $30 loss because you keep the premium.

secondly in this case the the stock is called away resulting in a net zero position.

 

[zdreg]

the short answer to writing itm calls strategy is the same as for most alluring
strategies is that bid and ask spread and carrying costs and commissions and tax implications will make the strategy unprofitable.

 

[Arnie Guitar]

Quote from zdreg:

there is no $30 loss because you keep the premium.

Thank you.

I found it funny that the guy who was telling someone they had "a lot of learning ahead" of them could make such a statement.

 

[zdreg]

Quote from OTR:

Options are seldom assigned prior to expiration. Most people will simply sell a call that they are long rather than take the trouble and pay the extra commissions to exercise the option and sell the stock. One of the previous posts explained the assignment process. You typically will get assigned immediately after the expiration (3rd friday of the month). The people that are buying back the call prior to expiration are doing it to avoid being exercised. They want to hold onto their stock.

Think things through and do some reading. I've got a feeling I know where you are going with this, but CC's are not a sure thing. The biggest mistake I made when first doing covered calls was selecting poor quality stocks. One CC stock dropped 33% the day after I bought it. I still own the stock and sell calls every month against it, bringing down my cost basis to a point that I have recovered the paper loss. Still, I'd rather not have this stock in my portfolio, but am forced to hold onto it for now.

Good Luck.


Regards,
Steve
http://www.options-trading-resources.com/EliteTrSig

Option trading information and tools the pros wish they had! A former Chicago Mercantile Exchange employee reviews stock option trading software, books, and web sites and online income opportunity.

"i rather not have this stock in my portfolio but am forced to hold on to it,"


you are not forced to hold on to your position. you can close your position and then move on with your life.

 

[ADLE]

Quote from Arnie Guitar:

Thank you.

I found it funny that the guy who was telling someone they had "a lot of learning ahead" of them could make such a statement.

I am here to learn stuff, so I don't take as an offence.

 

[RichardRimes]

Quote from ADLE:

Thank you guys for input, very informative.
When I write calls deep in the money I want my position to be assigned as soon as possible, from your input I understand that if I write leap calls I can wait for year to be assigned. :-(
How about buy stock and write current month ITM calls, how quick I would be assigned?
Lets say I bought at 30$ 100 shares and sold 2.5$ calls for current months 30 calls, calls were expensive because of high IV. How does it work?Is it really a lottery or there is some system?
And why people after third week Friday are waiting till Tuesday to see if their written calls were expired or not?It's not enough to see what happened by the end of Friday's trading session?
Sorry again for dump questions, but I couldn't find answers on these in any book, people usually write "you have to buy back your covered calls for less on third Friday" without really explanation Why I should buy back for less on third Friday if I see it's almost worthless? I hope you understand, sometimes even in books that covered basics you still have question - why.
Thank you.

I will try to answer your questions. No there is no lottery or system. It is always good to sell calls/puts when the IV is high...however there is no free lunch. The reason for the high IV could be detrimental to the underlying equity and that could drop. You are right that it would be to your advantage to be called away within a few days but this almost never happens because there is SOME theta or time value in all options.

Friday is the last day to roll your call (or buy it back) if that is what you want to do. When you SELL a call you have given the right to someone else to buy your stock which can be called away even on a Mon (happend to me last month) so even if the stock hasn't been called away on Sat...your not out of the woods so that is why you would buy it back for .05 unless you don't mind having it called away.

Selling deep ITM calls on stocks is a bearish play...you are hoping the stock goes down but not get called away...however if it is in the money it WILL get called away. There are just better option choices if you are bearish where you will get more bang for the buck so to speak.