selling in the money calls
- Thread starter aplino
- Start date
As you go DITM, you're increasing the probability of the underlying being called away. Is the thought of being short SPY attractive to you? I'm trying to imagine in what way this could be called "safe" or "conservative" and failing.
If you're short a call, you don't want the market going up. Say you're short at 400; if it expires at 450, you'll pay out 50 x 100, for a $5k loss per lot (less premium received, of course.) As to buying a put lower down - it's going to be OTM. What use is that supposed to be?
The only winning scenario here is the market going down, by at least the amount of extrinsic value in that call - that takes you to break-even. Anything lower than that is positive P&L.
That's a covered call, not just a short call. Big difference. And no, 100 SPY @ 408.84 is not the worst case; that's your cost at entry only. Say SPY goes up, and you get assigned at 410 (41000 credit) with the spot at 450 (45000 debit.) You got 3160 for the short call, so you're out $840 whether you sell out or hold.
Doesn't seem like an especially good risk.
(If you're buying the stock at the current level, at the same time as the call, then you have the equivalent of a low-delta short put; different numbers, with loss to the downside. I was still going with your original stated premise of selling a DITM call.)
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I did it a lot, using it as an hedge against long positions on spy (consisting of diagonals). You won't get called a lot, and if you do, you can close the short position and roll another itm call if wanted.
What is your 'goal' with doing this?
It seems that I can generate around 15% a year without risking much.
Sure, you'll earn $116. To do so, you will be tying up over $40k of your margin. Meanwhile, a short put in SPY at about the same delta will pay the same amount while only requiring 1/5th of that - meaning you could trade 5x as much for the same account size (it wouldn't be smart to leave yourself with zero headroom, but having the option is rather nice.) I'm just not seeing any benefit to doing the CC unless you're already holding the stock below current price.