Deep-ITM covered calls

Quote from rcmcfe:

Just so I'm clear on this, here's my position.

Bought 100 shares of ICO yesterday @ 22.95. Sold 1 contract of the Aug. 22.5 calls for a premium of 3.10....

Well, today ICO is trading @ 27.69 and the price of the 22.5 call is 6.00..

So...the way I figure it, I have 3 options...

1) do nothing @ expiration, & at which time my 100 shares will be exercised @ 22.5. This leave me with a 45 loss (22.95-22.50). But I will get to keep the 310 premium I received when I sold the calls...

or

2) buy back the 22.5 calls and take a loss of 290 (6.00-3.10*100). ( this is assuming I bought back the calls today). But I get to keep the stock.

or

3) buy back the calls @ expiration in which case I keep the stock but could suffer a loss on the call buy-back.

Is this correct? This is my first covered call trade.

Thanks.
More...
The 3 choices you outline are all things you can do (plus there are lots of other possible adjustments) and they all make money as long as the stock stays above your short strike. However, once you adjust your position the risk changes again.
To better understand what you're doing it helps to realise that you actualy have a synthetic short put with a strike of 22.50 which is now far otm - iow you are doing well. Your max profit is your initial credit minus the difference between short strike and price paid for stock. As long as your underlying stays at or above your short strike by expiry you will keep this maximum profit. Isn't that what you wanted? As Eliot said 'what was your initial plan?' now that you have made your profit?
db
 
Quote from daddy'sboy:

The 3 choices you outline are all things you can do (plus there are lots of other possible adjustments) and they all make money as long as the stock stays above your short strike. However, once you adjust your position the risk changes again.
To better understand what you're doing it helps to realise that you actualy have a synthetic short put with a strike of 22.50 which is now far otm - iow you are doing well. Your max profit is your initial credit minus the difference between short strike and price paid for stock. As long as your underlying stays at or above your short strike by expiry you will keep this maximum profit. Isn't that what you wanted? As Eliot said 'what was your initial plan?' now that you have made your profit?
db
More...

Thanks for the response and confirming my thoughts. I'm going to stick with option 1 for now...

Thanks again.
 
Am I correct in assuming that early exercise is not common? If that's the case, and you're long stock but short deep itm (which will likely be 100 delta calls say by next week's August expiration), and you have no bias about the stock's direction between now and expiration, does it make sense to wait until expiration next Friday before covering your short call position? This is assuming you do not want to be called out of your long stock position. On that note, are you guaranteed that the counterparty will exercise deep in the money calls? Are there any exceptions? Thank you.
 
Quote from pdwst33:

This is assuming you do not want to be called out of your long stock position. On that note, are you guaranteed that the counterparty will exercise deep in the money calls? Are there any exceptions? Thank you.
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You don't have a long stock position. You have a DITM CC, which is in fact a DOTM short P. Whatever composes your position doesn't matter, it behaves as a compound unit.

Ursa..
 
Quote from pdwst33:

Am I correct in assuming that early exercise is not common? If that's the case, and you're long stock but short deep itm (which will likely be 100 delta calls say by next week's August expiration), and you have no bias about the stock's direction between now and expiration, does it make sense to wait until expiration next Friday before covering your short call position? This is assuming you do not want to be called out of your long stock position. On that note, are you guaranteed that the counterparty will exercise deep in the money calls? Are there any exceptions? Thank you.
More...
If bid price suggests that the call holder can make more money by exercising rather than selling the call you will be at risk for assignment. Otherwise assignment is rare.

Likewise if the ask price suggests slippage it might make sense to re-buy the stock rather then buy back the short call (assuming you have the finances. Also consider transaction fees). Just let the original stock be called away.

The answer to the question of covering early is usually not clear-cut unless you have strong feelings about stock direction. If you can get a favorable fill then it might make sense to cover early.

You are virtually guaranteed that an ITM call will be exercised. If it is not, it would likely be a very rare and welcome windfall for you.

Don
 
Quote from pdwst33:

Am I correct in assuming that early exercise is not common? If that's the case, and you're long stock but short deep itm (which will likely be 100 delta calls say by next week's August expiration), and you have no bias about the stock's direction between now and expiration, does it make sense to wait until expiration next Friday before covering your short call position? This is assuming you do not want to be called out of your long stock position. On that note, are you guaranteed that the counterparty will exercise deep in the money calls? Are there any exceptions? Thank you.
More...
1.If a stock option is itm by $0.05 or more at expiry it will be automatically exercised/assigned ($0.01 or more for index options).
2. If a short option has no/little extrinsic value it is at risk of early assignment (e.g. deep itm short call).
3. An option can be exercised/assigned at any time prior to expiry, even if it doesn't make sense.
4. If there is an upcoming dividend a short call is at risk of early assignment depending on the value of the dividend, the cost of carry and the extrinsic value.
db
 
1 more question:

Say I sell 1 call for 5.20 (receive 520 premium)...At expiration, the call is worth 2.50 and expires out of the money.

What happens if I do nothing...? Do I keep all 520 received as premium. Or do I keep only 270 (520-250)? I know I can buy it back before expiration, but I'd like to know how much premium I keep if I do nothing at expiration.

Thanks.
 
1 more question:

Say I sell 1 call for 5.20 (receive 520 premium)...At expiration, the call is worth 2.50 and expires out of the money.

What happens if I do nothing...? Do I keep all 520 received as premium. Or do I keep only 270 (520-250)? I know I can buy it back before expiration, but I'd like to know how much premium I keep if I do nothing at expiration.

Thanks.
 
Quote from rcmcfe:

1 more question:

Say I sell 1 call for 5.20 (receive 520 premium)...At expiration, the call is worth 2.50 and expires out of the money.
More...
A call that is OTM at exp has worth zero (0).

And yes, you can keep all of the premium recieved.
 
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