if you're writing covered calls, do you always do a far away expiry?

[1a2b3cppp]

Say I own QQQ at $55 and I'm planning on selling it at $60. Since I'm planning on selling it at $60 I might as well write a covered call right? Ok.

April 60 calls are selling for like $0.04 right now. So I'd make $4, which would be a net loss after comission.

July 60 calls are going for like $1.11. So I'd get $111. That's better.

Jan 60 calls are $2.39. That's even better!

So if I'm going to sell my QQQ at 60, wouldn't it make more sense to write Jan calls rather than April calls? Because as long as price hits 60 per share sometime before the option expires, I can sell it and still keep the premium right?

After you answer that, I have a few followup questions about another possible scenario:

What happens if I have my Jan covered call and I collected my $239, but then I decide that I'd really rather sell my QQQ at 57 instead of 60? Am I stuck waiting until January anyway? Do I have to buy back the call or something and then write another covered call for 57? Do you lose money on the buy back?

Thanks guys

 

[Madison]

The Jan option expires in January - there is a reason it costs more. The right to exercise is held by the option buyer, not the seller - the seller is on the hook (and in the case of a seller of calls, is obligated to deliver shares upon exercise) until it expires or the buyer decides to exercise.

 

[1a2b3cppp]

So ITM options aren't automatically exercised at expiration? I thought I read that they were.

So you can potentially keep your shares AND the premium even if it's ITM? :eek:

 

[nazzdack]

Quote from 1a2b3cppp:
----QQQ at $55....
----I'm planning on selling it at $60....
----April 60 calls are selling for like $0.04....
----July 60 calls are going for like $1.11.
----Jan 60 calls are $2.39.

You may find that you can earn more premium by trading a shorter-dated option more frequently, i.e. trade a 2-month option, 4 times, instead of holding an 8-month option until expiration, only once.

 

[1a2b3cppp]

Quote from nazzdack:

You may find that you can earn more premium by trading a shorter-dated option more frequently, i.e. trade a 2-month option, 4 times, instead of holding an 8-month option until expiration, only once.

Whoa you are right. But commissions would eat into that.

So if I sell a July QQQ 60 covered call for $1.11, let's say price goes down to 50 and I decide that now I would rather sell my QQQ at 55 rather than at 60, so I want to get rid of that covered call. Is it likely that the original July 60 call that I sold would now be worth less than $1.11 (since price is further away) and now I could buy it back to close for less (so I still made a little money on it) and no longer have the obligation to sell my QQQ at 60?

 

[spindr0]

Quote from 1a2b3cppp:

July 60 calls are going for like $1.11. So I'd get $111. That's better. Jan 60 calls are $2.39. That's even better!

So if I'm going to sell my QQQ at 60, wouldn't it make more sense to write Jan calls rather than April calls? Because as long as price hits 60 per share sometime before the option expires, I can sell it and still keep the premium right?

What's best depends on your R/R objective/tolerance and what the market does. If QQQ is 59.9999999 at Jul exp, you'll keep the premium and get to write again. At that time, the Jan 60 calls might be worth $3 or so and the double write total is a lot better than $2.39 that you'd get for doing Jan now. OTOH, if QQQ drops, $2.39 gives more downside than $1.11
Pick your posion

What happens if I have my Jan covered call and I collected my $239, but then I decide that I'd really rather sell my QQQ at 57 instead of 60? Am I stuck waiting until January anyway? Do I have to buy back the call or something and then write another covered call for 57? Do you lose money on the buy back?

If the ask price of the call is greater than what you sold it for then buying it back will incur a loss with a buy back.

 

[1a2b3cppp]

Quote from spindr0:

If the ask price of the call is greater than what you sold it for then buying it back will incur a loss with a buy back.

Well yeah, but if price moves down and away from a call's strike price, wouldn't it tend to go down? Doesn't selling calls put time decay on your side anyway? I would assume that as time goes on, there is less chance that the stirke price will be met and therefore the price of the option would go down.

Basically I want to be able to be able to get out of the original covered call (without taking a loss) and write a new covered call for a lower price in the event that the price of the underlying goes down.

 

[tradingjournals]

Quote from nazzdack:

You may find that you can earn more premium by trading a shorter-dated option more frequently, i.e. trade a 2-month option, 4 times, instead of holding an 8-month option until expiration, only once.

What is the sequence of trading (buy premium first or sell it first, etc)?

 

[stoic]

Quote from 1a2b3cppp:

After you answer that, I have a few followup questions about another possible scenario:

What happens if I have my Jan covered call and I collected my $239, but then I decide that I'd really rather sell my QQQ at 57 instead of 60? Am I stuck waiting until January anyway? Do I have to buy back the call or something and then write another covered call for 57? Do you lose money on the buy back?

Thanks guys

If you want to exit the position early, you would have to Buy to Close the 60s, a gain or loss will depend on what the cost to close is vs the sell to open. You can always unwind the position.

The attached shows the results from a Buy-Write calculator I use based on prices today. I ran the number for May, June, Sep. and Jan '12 60 calls for cash and margin at 80% equity.

 

[1a2b3cppp]

Quote from stoic:

If you want to exit the position early, you would have to Buy to Close the 60s, a gain or loss will depend on what the cost to close is vs the sell to open.

I know that it depends on the relative prices. I'm asking if it's safe to say that, generally speaking, as time goes on and price goes down below the strike price of an OTM call, the value of the option tends to go down as well.

You can always unwind the position.

I don't know what that means.

The attached shows the results from a Buy-Write calculator I use based on prices today. I ran the number for May, June, Sep. and Jan '12 60 calls for cash and margin at 80% equity.

Free shareware calculator???