Protecting a covered call position
- Thread starter Pekelo
- Start date
If you're very confident that the stock will drop, then sell the stock and buy puts. If you think it will go back to the strike price, but not much further, sell the stock and leave the short call on. When in doubt, get out.
Theory and option greek mumbo jumbo? LOL.
People tend to sell OTM covered calls (see OP's question)
The position is delta long
It earns money when the stock moves higher
It loses money when the stock moves lower
These are not the characteristics of a neutral position.
Close position. When I do CC I try to sell calls at the money. If there is a decent price increase the call is then in the money by quite a bit. As the price moves and the options becomes deeper in the money, it is losing premuim.
Determine how much premium you want and what kind of decay you are looking for. Once enough premium has been removed from the option, close out.
What is the issue?
- Low premium collected.
- If ABC got to $110 it will most likely settle well above $110.
- The option premium collected will be less than the difference of ABC and the option strike (110.00).
- Options 101 - "There is no free lunch".
Covered calls are not a method to get rich, nor is buying options. Like most other instruments the options market is fairly efficient and finding mis-priced options is not a trivial task.
Covered calla and naked puts have essentially the same reward curve. In a bull, neutral, or even mildly bearish market you can clean up, but sooner or later that fat tail on the distribution curve whips around and catches you.
Low premium/high premium, if the underlying hits my target price ($110), whatever the premium is enhances the trade.
If ABC settles above $110, who cares? My target was $110, mission accomplished, onto the next trade.
Again, so what.
Who is looking for a free lunch?
- I never posted they where -so don't quote my posts and throw that in there.
- I don't like Covered Calls - as my posts indicate.