Friday, March 10th, 2017

Question about Covered Calls?

I started learning a bit about the options and I have a couple of questions about calls cubiertas.Si you buy a stock and writing a call that is very, very deep in the money, you have downside protection Depreciation Stock – Price the opción.Sin However, your benefit will be much lower. I have done several examples of this and realized several things, some need to clarify the following: If the call is sold deep in the money (and people also bought) and has been exercised, the premium is paid time really , right (assuming no transaction costs)? So a covered call is sold in depth the money and exercised really has a maximum benefit of the premium of time, right? Because time increases the premium on the calls we approach the stock price lowest to highest and decreases as you go from top to bottom, you get higher returns by selling calls with strikes closer to the stock price. i. e. you get an increase in profits by selling a call off a strike from 35 in place of a strike of 30, if the stock trades at 40. This is assuming that you are pursuing a strategy of covered call and has also purchased the shares at 40. It also implies that the call is exercised and the transaction costs are cero.Este not the case if the call is sold out of the money (and the related balances have also purchased). In this case, you still have protection stock_price downward – purchase price, but in order to achieve maximum benefit, his action should increase in the price (For the difference between strike and stock price), is not it? At first I was thinking about a knitting strategy called covered with an option that is deep in the money, but because the time premium declines as we move away from price action looks set to be rewarded very small / small risk and high transaction costs in the final instance, make you lose dinero.Por therefore not a viable strategy for small traders monta.Una fastest thing I’ve been reading the book of McMillan and says, “unless a sufficiently deep in the money-writing is considered, the return [to] the margin is always greater than the return of cash. ” The reason this happens is because the interest you pay a great interest in the margin and, together with transaction costs, costs weigh him and make him have a much smaller yield than using cash to dry, right? -Larry

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5 Responses to “Question about Covered Calls?”
  1. Tari Lee says:

    covered calls are for sissy marys……

  2. James says:

    This is not a new options strategy but a known options strategy known as the “Deep ITM Covered Call”.

    The deep itm covered call is as close to an arbitrage as you can get as a retail options trader without using any sophisticated software. By selling deep itm call options at delta of 1 or very close to 1 like 0.99, you are totally hedged against any directional risk on the underlying stock. This means that your account value should not be affected no matter how the stock move upwards or downwards. The profit of the strategy comes solely from the extrinsic value remaining in the itm call options. However, as you have mentioned, as deep itm options contains very little extrinsic value, the profit will be very low after considering commissions. It is a viable strategy if you perform it through discount brokers with as low a commission as possible. However, don’t expect to make big money with such a strategy. The Deep in the money call options that I do on AAPL lately returned me only about $15 per contract in profit. Options trading is fair game and the safer an approach, the lower the risk, the lower the profit as well.

    Early assignment is good news for writers of deep in the money covered calls. As the call options are so deep in the money, they are highly susceptible to early assignment which will unwind the position instantly, posting the extrinsic value profit instantly into your account.


    By the way, Optiontradingpedia does mention that the position is an unlimited loss position and even introduced how to calculate for its losing point.

  3. zman492 says:

    < <>>

    I think you understand correctly, but did not word that sentence well. the (stock price – option price) is the cost of opening the position, so that is the amount you are putting at risk, not the amount of downside protection. That also makes it the break-even point, which is what I think you wanted to say. The amount of downside protection is simply the option price.

    < <>>


    < <>>

    Right. The earlier the better. Of course, if that is what is best for the seller means it is worst for the buyer, so do not expect it to happen more often than a blue moon.

    There is one exception. If the company is going to pay a significant dividend the call is likely to be exercised immediately before the ex-dividend date.

    < <>>

    Once again that is the break-even point, The amount of downside protection = the call price.

    < <>>


    < <>>

    I agree it is not a good strategy for small-time investors, or anyone else for that matter, because of the small reward. However, I think it is a bad strategy because of the terrible risk-reward ratio. While it is true you will make money almost every time, the amount you make is so small that one loss could wipe out years of gains.

    McMillan’s “Options as a Strategic Investment” was written before on-line brokerages existed, so he tends to overstate the importance of transaction costs. If I recall correctly, when I did my first options trade the minimum commission was around $50 and commissions for options trades could easily run into the hundreds of dollars.

    < <>>



    It is important to realize that buying a stock and selling a covered call on it has exactly the same risk-reward characteristics. as selling a naked put. So, if you buy a stock for $20 and sell a $10 call for $10.10, that has the same risk-reward as selling a $10 put for $0.10. In either case the most profit you can make is $10 and the most you can lose is $990.

    Almost anyone with option experience will tell you that writing far out of the money puts for small premiums is a very bad idea. Unfortunately some people fall in love with the strategy because they make money month after month and they downplay the risk involved. The problem is that it only takes one really bad day to wipe them out financially, and if you trade long enough that day will come.

    The fact that the “optiontradingpedia” article another answer supplied barely acknowledges that risk, calling the strategy “As close to an arbitrage profit as it can get,” is a clear indication that the site was prepared by people who do not really understand options well. Stick with McMillan.

  4. YouAsked4it says:

    It seems that this principle in option trading applies – the higher the risk, the higher the potential reward – and vice-versa. The deeper in-the-money an option price goes, the more intrinsic and less “time” (i.e. extrinsic) value applies, therefore you are really only hedging the stock you have purchased against price decline, with the call options you have sold. The ‘hedging’ is also limited only by how much in-the-money the option strike is.

    This is nice if you’re looking at a longer term investment strategy and relying mainly on dividend income, or if you have purchased your shares at a discount by first selling put options at a strong support strike price, then being exercised – then after the stock has been allocated to you, you sell your deep ITM covered calls for even more protection.

    It is unlikely you will come across any ‘volatility spikes’ for options that are very deep ITM. But at least the calculation for potential profit should be quick and easy. For example, if you’re selling calls $5 deep ITM and the option price is $5.50 you can see right away that you have $0.50 times the number of shares per contract, less brokerage on the transaction, as your potential profit. Then it becomes a matter of economies of scale. For only 1 contract on 100 shares you make $50 less brokerage. For 10 contracts you make $500 less brokerage – but then it will depend on the price at which you have purchased the shares to determine your ROI. If you’ve bought the shares at $25 then you’ve invested $25,000 ($25 x 100 x 10) to make say $470 which is 1.8 percent per month.

    But if you paid only $10 for the shares and sold $5 deep ITM for the same profit, then you’ve invested $10,000 ($10 x 100 x 10 contracts) to make $470 which is 4.7% per month, with 50% share price protection (the share price would have to fall from $10 to less than $5 before you lose).


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