Selling naked calls OTM & covering them just before ITM?

[TheDawn]

As the title says, I’d like to sell naked calls far OTM and cover them by buying the underlying if the price approaches the strike price so that they’re covered when ITM.

Why this strategy? If I have to buy the underlying I want it to be in an uptrend.

I don’t mind having it recalled if the calls are ITM, I’m here to only collect the premium. And if they actually become ITM and I bought the underlying a bit below there’ll be a little bit of profit there too.

If the price doesn’t hit the strike price and I’ll be left holding the underlying after the original calls expire, due to the uptrend it’s likely the current price won’t be far from the entry price, so either I can sell it for a profit or take a small loss or write covered calls near the entry price to get out of the position quickly and without a loss.

The risk obviously here is that if the price moves abruptly ITM I won’t be able to cover the naked calls with an entry price below the strike price.

Another risk would be that if the price of the underlying just collapses after I bought it I won’t be able to write those covered calls near the entry price.

Any feedback on this idea?

People usually do covered calls on shares that they already own so to have a bit of profit when the stock is in a temporary downtrend while waiting for the stock to turn around. If you were going to cover the short with stock, I would buy the stock at the same time when I short when the stock price is still low so that way there is no risk of not being able to cover due to the stock price potentially gapping up past the strike price. By the time that the short call is about to be ITM, the stock price has already appreciated so much so even if you were still able to buy the stock below the strike price the profit from the assignment would be much lower vs if you had bought the stock earlier when the price was lower. Why make a small profit when you can make a bigger profit on the underlying if the stock moved up?

If you never wanted to buy the stock and just wanted to short options for the premium, then might I suggest you to buy the call instead to turn the naked short into a spread. That way you have covered the naked short and you won't have to deal with the risk of buying the stock only to see the stock price turn south against you and you lose even more on longing the stock.

Anyway experiment a bit, do a small position and see how it works.

 

[TheDawn]

Taoman!!!

Oh,now i get it..stock rips,your going to be synthetically short puts for goober after a massive run up..Back up the trucks,what could possibly go wrong??

He already said what could go wrong in his first post:

The risk obviously here is that if the price moves abruptly ITM I won’t be able to cover the naked calls with an entry price below the strike price.

Another risk would be that if the price of the underlying just collapses after I bought it I won’t be able to write those covered calls near the entry price.

Stop bashing the new guy!! LOL

 

[Cabin111]

I don't know if any of these are good examples...If memory serves me correct;

Didn't Robinhood limit what options people could trade when Me Me stocks were hot...GameStop and AMC? Didn't IB lock up a few times in the last few years when the market was very active? I know better safeties are in place, but my mind goes back to the 1987 market.

https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=&cad=rja&uact=8&ved=2ahUKEwjh-c6b7rz-AhX6NEQIHZYFBScQFnoECEMQAQ&url=https://en.wikipedia.org/wiki/Black_Monday_(1987)&usg=AOvVaw3xT6npCO2c7zlTcVqMmSE4

Lastly...Am wondering what a bank crisis would do??

Eyes wide open...

 

[taowave]

Dawnster,what is happening here

By definition,covered calls is on stocks they already own..

Short stock????

People usually do covered calls on shares that they already own so to have a bit of profit when the stock is in a temporary downtrend while waiting for the stock to turn around. If you were going to cover the short with stock, I would buy the stock at the same time when I short when the stock price is still low so that way there is no risk of not being able to cover due to the stock price potentially gapping up past the strike price. By the time that the short call is about to be ITM, the stock price has already appreciated so much so even if you were still able to buy the stock below the strike price the profit from the assignment would be much lower vs if you had bought the stock earlier when the price was lower. Why make a small profit when you can make a bigger profit on the underlying if the stock moved up?

If you never wanted to buy the stock and just wanted to short options for the premium, then might I suggest you to buy the call instead to turn the naked short into a spread. That way you have covered the naked short and you won't have to deal with the risk of buying the stock only to see the stock price turn south against you and you lose even more on longing the stock.

Anyway experiment a bit, do a small position and see how it works.

 

[taowave]

Not bashing,illustrating what a terrible strategy it is...

Sells naked calls for goober,doesnt manage his risk(delta hedge/close short call),then picks a completely arbitrary point to not only hedge a 50 delta call option,but overhedge and turns a bearish position into a bullish position,i.e short put.

Aa one poster illustrated,its steamroller city

Taoman!!!

He already said what could go wrong in his first post:

Stop bashing the new guy!! LOL

 

[anon9812]

What overhedge or a short put are you talking about?

The amount of underlying will correspond exactly to the number of calls (*100).

Also not sure why are you assuming the potential gains will be low. I won’t be selling index or MSFT options …

 

[taowave]

think about your strategy,and you have already mentioned the inherent risks

you sell a cheapo call,lets say 10 delta..What percent of notional do you take in

( call/stock price)

stock runs up to the short strike,short call is now ATM,50 delta.

for some reason,you are choosing to buy 100 shares against a 50 delta option...

So at strike,you will own 100 shares against your 1 short ATM call.

Long stock + short call = short put

How can the gains not be low. You sold a cheap option,never hedged till at strike.

If you do as you stated,you will have sold a put for close to zero(premium on short call)

Best case scenario,stock sit still/goes lower, and you collected tiny premium on the short

call..

Terrible execution

 

[cesfx]

What overhedge or a short put are you talking about?

The amount of underlying will correspond exactly to the number of calls (*100).

Also not sure why are you assuming the potential gains will be low. I won’t be selling index or MSFT options …

You are thinking at expiration.

By the time you get there, price whipsaw could come against you for more than the tiny credit you take.

 

[rptech]

Nice discussion here

 

[qlai]

What overhedge or a short put are you talking about?

They are thinking as options (volatility) traders, and your strategy is a directional one. I prefer to do the opposite, sell calls at strikes where I would want to be short, but as I said the light isn’t worth the candle.