Selling In the Money Covered Calls Strategy Question

[guru]

One final followup: Since selling covered calls and naked puts are mathematically equal, why would one choose one over the other?

I wouldn’t choose them for any specific reason, or maybe whichever one feels more logical at the moment. For example if I already have shares of the stock then I’d sell covered call, but if I don’t have shares then I’d sell naked put. Some people alternate between them and call this “The Wheel” strategy, but without understanding that both trades are equivalent.
And most people who trade only covered calls also don’t understand that its the same as selling naked puts. So they just learn one of them.

Sometimes they can also be used in combination with other strategies where it’s easier to think of combining strategies together. For example I may have long-term puts as a hedge/protection, while selling short-term puts every week (no longer fully naked due to the hedge).

 

[lightninboy]

Relative newbie question here about selling in the money covered calls. My example based on an actual stock I'm looking at:

Buy XYZ 100 shares at $51
Sell in the money covered call for $1.20 premium with a strike of $50.

At expiration, the stock is above $50.

In this case, I lose $100 on the stock (as it's called away at 50), but gain $120 from the call premium. Thus gaining $20 per contract.

Is this a legit strategy?

Is this a common strategy to use where a trader plans to take a loss on the stock, but comes out ahead because the premium is greater than the stock loss?

It's one of the main ways to make a buck in the market, as far as I'm concerned.

 

[Wheezooo]

It's one of the main ways to make a buck in the market, as far as I'm concerned.

...until, one day, at band camp, when someone shoves a tuba up your ass.

 

[Baozi]

...until, one day, at band camp, when someone shoves a tuba up your ass.

Or a trombone. Or both.

 

[misterkel]

...until, one day, at band camp, when someone shoves a tuba up your ass.

I don't go to Band Camp. And a Tuba wouldn't fit. what are you talking about? Is this some kind of metaphor? I'm Canadian, so I don't get it.

 

[Wheezooo]

I don't go to Band Camp. And a Tuba wouldn't fit. what are you talking about? Is this some kind of metaphor? I'm Canadian, so I don't get it.

It's a twist on a meme from the greatest film of all time, American Pie, particularly apropos to when what's coming is entirely unexpected.

F'n, Canadians, just don't appreciate art... no idea why we allow you to have your own country.

 

[misterkel]

F'n, Canadians, just don't appreciate art... no idea why we allow you to have your own country.

Thanks for letting us! We sure 'preciate it. And we DO appreciate art - just not too much.

 

[spindr0]

With selling covered calls and the synthetic equivalent of selling short puts, two old expressions come to mind:

- It's like collecting pennies in front of a steamroller

- Most of the time you eat peanuts and sometimes you shit like an elephant

 

[Cabin111]

I wrote the same thread a few weeks ago!! You are not stupid. I will do the same thing, basically "at the money" covered calls. I bought BABA for $179.30 I think. Sold the covered call Jan 2021, $180...Got $21.+ change. You get the profit (very small amount...If it gets called away), dividend (if they declare), and the option money working in a money market fund (between 1-2%).

You must/really should choose a company that is an industry leader. They should be holding, or gaining market share. This would be for safety, "in the money" positions...

I asked here, but never found out if it is legal to go below the price you bought it at...I could ask my CPA, but haven't bothered.

https://www.elitetrader.com/et/threads/slv-silver-is-this-legal-is-this-profitable.337886/

 

[Wheezooo]

I wrote the same thread a few weeks ago!! You are not stupid. I will do the same thing, basically "at the money" covered calls. I bought BABA for $179.30 I think. Sold the covered call Jan 2021, $180...Got $21.+ change. You get the profit (very small amount...If it gets called away), dividend (if they declare), and the option money working in a money market fund (between

I asked here, but never found out if it is legal to go below the price you bought it at...I could ask my CPA, but haven't bothered.

https://www.elitetrader.com/et/threads/slv-silver-is-this-legal-is-this-profitable.337886/

1 - Yes, it's legal
2 - Funny, I saw you say elsewhere that you have only traded puts twice, when all you do is sell puts.