Fence Strategy

D

Doug125

When would a stock be called away when selling a covered call, if the underlying asset rises above the call strike price? Would the stock be called away upon expiration only, or as soon as the price of the underlying asset rises above the call's strike price?

My idea is to have a fence spread with a covered call, which would pay for the put, with perhaps a slight credit. I would hope for the stock to be called away, so I could build a new fence on a rising market, and gradually accumulate puts. After several iterations, wouldn't I have enough deltas in the accumulated puts to buy fewer and fewer puts to build the fence at the higher level, and therefore achieve the same downside protection with a greater credit?

Would this strategy be best suited for longer-term options?
 
Stock is called away when the other side of your contracts decides to excersize them. This strategy of yours will only work if you leg into your position (or if you get a sneaky arb going) for buying stock and selling call EQUALS selling a put (so your position would be; ill sell a put and buy a put :))

unless you buy a longer put ofcourse, but even then, what if the stock breaks out and you are excersized; then you will have no more stock and a long put options thats gona expire worthless so with the next setup youll have to close another put contract.

hm

Tiki
 
Thanks, Tiki. Couldn't I simply buy back the stock after it's called away, sell a new covered call at a higher strike, and then use the credit to buy a put at a higher strike? Even though the first put would be farther out-of-the-money, wouldn't I have slightly more downside protection, at a lower cost?

I would hope to do this with contracts that are about 1-year from expiration. I don't think this would be effective unless the stock is called away as soon as it rises above the call strike price.

In practice, are covered calls on longer-term options usually exercised before expiration, when the underlying asset reaches the call's strike price?

Doug
 
Thanks, Tiki. Couldn't I simply buy back the stock after it's called away, sell a new covered call at a higher strike, and then use the credit to buy a put at a higher strike? Even though the first put would be farther out-of-the-money, wouldn't I have slightly more downside protection, at a lower cost?

I would hope to do this with contracts that are about 1-year from expiration. I don't think this would be effective unless the stock is called away as soon as it rises above the call strike price.

In practice, are covered calls on longer-term options usually exercised before expiration, when the underlying asset reaches the call's strike price?

Doug
 
No, they are usually excercized when the price of the stock is higher then [price of the call] + [strike price]

say stock is at 16, and there is a call15 out there priced 2.50

people would be crazy to spend 2.50 to buy something at 15 thats priced 16

comprehende?
most of the time calls are only excercized when

1) something disturbing is gona happen to the stock (disturbing in an up move, that is)
2) when they have nearly ran out of time

Tiki
 
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