Characteristics of a good and Low risk Deep ITM covered call

[parisd]

Using poweropt.com it is possible to find amasing opportunities for Very Deep In The Money Covered calls with downside protection of 20 to 40% (sometime more with Covered puts) and return until next expiration of 1 to 5%.

Ex: Buy TASR at 16.69 and Sell 05 FEB 15.0 for 2.35; downside protection 17%, return if assigned untouched 4.6% duration 15 days. (+similar opportunity with 33% downside and 1.4% return on same stock different callstrike)

This would means a pretty sure return of up to 5% a month at low risk.

Curiosly, most of these sure trades I have tried had huge Gap down orhuge pricemovement during the days before expiration and even the 30% downside protection were not enough as hedge!!!!

The reason below this is probably that this kind of High return Deep ITM Covered call are extremely high IV of the option and that why even in few days from expiration we get stock moving too much and get a losing trade.

MY QUESTION IS WHAT SHOULD WE CAREFULLY CHECK ABOUT THE STOCK BEFORE TO ENTER A DEEP ITM COVERED CALL, AND IS THERE ANYWEBSITE SPECIALISED IN DEEP ITM COVRED CALLS ??

I STILL beleive dEEP ITM covered call if correctly selected are simple AND SAFE way to generate 1-2% a month.

Using QQQ ETF wouldbe great, I could not find such opportunity with QQQ as the premium is too low.

Tk for your feedback

 

[Effkay]

The way options are priced means that there is no way to make a safe 1-5% or otherwise. If the options have a lot of 'time' premium, it will be because the stock is volatile and so the downside protection is pointless in a way. e.g. 20% downside protection is useless for a stock that moves 50% a month.

 

[bulldozer]

Paris,
You sound like a novice and you dont have enough knowledge to start trading Options, let alone writing them. I strongly reccommend you do paper trading for the next 3-6 months.
Your concept on Options is going to have a drastic effect on ur account. Most of ur cash is going to end up in other option traders account and a good bit of it will go to ur broker. Below are some tips you should KNOW/ INPROVE on :

RULES TO REMEMBER!
1. Never write ITM options put or calls. covered or otherwise.
2. If you are going to do a "buy write strategy" You should write OTM calls. NOT ITM.
3. Allways try to write Eu style NOT American style. Buy US style is OK.
4. You run the risk of being assigned from day one if ur writen positions are ITM
5. Spend more time learning>> Calendars, diagonals, Delta and Theta.
6. Never forget the above FIVE rules.

bull

 

[Effkay]

bull:

1,2) why not sell itm covered calls? They make a lot more sense than otm calls as far as downside protection goes

3,4) If you use EU style options you can't be assigned until expiry, and even if you are assignedusing US, you keep all the time premium for free.

 

[parisd]

I am trading since 1985, saw the october 87 crash without being able to adjust positions and am trading ATM covered call since 2 years, I have even suggested improvement to poweropt diagonal spread 2 years ago.

With deep ITM covered call I definitively wish to be assigned, the day one would even be better than waiting until expiration as I know in advance I will lock into a small profit as soon as I am assigned. The problem is despite large downside protection that deep ITM covered call offer, sometime I dont get assigned (the stock drop too much). As Effkay wrote above, that's because the screener select the volatil stocks with high time value calls.

I was wondering about any screening software set-up to pick-up good ITM covered call candidates

Denis

 

[Effkay]

Paris,

The best way to do this would be to find stocks that have higher implied volatility than you expect, and then use those as candidates (perhaps that's a bit hopeful!)

I agree with using itm covered calls to lock in SMALL 'guaranteed' profits.

 

[bulldozer]

1. ITM Position have very little time value compared to OTM or ATM positions.
2. Where is ur down-side protection on writing ITM Calls? if the stock goes down in a big way?Your calls premiums wont save you.
3. Writing OTM Calls gives you MORE time value than ITM in most cases 3 times more with less chance of assignment.
4. If you get assigned and you have NOT been monitoring your WHOLE possition, there is a chance the stock goes in the oposite direction [just after assignment] Then you would be facing a big loss plus all the commisions.
5. The whole idea of doing a buy-write is to make money on BOTH POSITIONS with less costs on commisions. Make money on the STOCK and keep the premiums taken from the calls, without losing the stock .
6. The position or strategy should be thought out/designe'd at the opening, to give you profits from the writen Calls to finish worthless and you still remain HOLDING the stock without having to pay commissions each time the stock is called away by assignment and then pay commisions again to buy them back!! Why go through all that xpance in commissions just to start all-over again for just 5-10 percent a MONTH profit!! Most of your profit is going to end up at the brokers pokets anyway!!

Eu .v. Us style: Why is it then that there is more trades done on the footsie index on Eu style and NOT even one tenth done on Us style? Ask your brokers for the answer dont take a guess. you will both be amazed at the answer. or U can ask LIFFE why they are thinking of closing the US style options on the Footsie.

Finally, Just one question for paris: Would you do a heavy buy write position with an ITM writen calls?

An Option trader with 10 yrs + xperience should now be on a minimum of 20 % profit per month

bull

 

[TheBramble]

Can I ask a very basic question here?

Why are you referring to 'time value' in relation to OTM/ITM rather than 'intrinsic value'?

I thought time value was more a function of the series, not the strikeprice.

 

[Effkay]

When doing a covered call itm, it's not the premium that will save you really, it's the fact that the strike is well below your buying price, and that's what saves you.

I don't really understand your 4th point......

5) using otm covered calls, the idea is to make money on both, but as paris said, when u do an itm covered call, you want to be assigned, and so there is no chance of winning on your stock purchase.

 

[bulldozer]

Bramble,

ITM position ALWAYS has more intrinsic value than time value.

An Option WRITER targets he's profits from OTM positions that have NO intrinsic value but has HEAVY time value.

An option trader that BUY's options is always looking to buy a position with less intrinsic and a little bit of time value. He is looking to make the profits when the position goes to DELTA+1 DEEP ITM and heavy intrinsic with little time value heading to xpiry.

bull

 

[Effkay]

Bramble,

an itm call must have more intrinsic value by definition than an otm call. Therefore an otm call is all 'time value'.

However an ITM call has 'time' value too otherwise it would be a free position for buyers.

 

[bulldozer]

When you've been assigned, in most cases not all the stock is called away, you may still be holding some. Now that the stock has turned after assigmt to the down side and ur holding has devalued where is your profit from the whole exercise?

Where is ur down side protection? if youre not yet assigned and your still holding ur buy-write, and the stock is falling you dont have a HEDGE/protection in place!

bull

 

[Effkay]

When setting up a 'true' itm covered call, you make sure that all your stock will be assigned.

The whole point of an itm position is to be assigned. The buyer would be a fool not to assign you if the price is above the strike at expiry, as he has paid for it.

 

[bulldozer]

Effkay,
I'm not talking on xpiry.
OK, lets say ALL the stock was taken at assgmt.

If the whole strategy was designed to make just 5 %, You would have to make the outlay of ur investment over £30.000 to make it worthwhile! do you agree on this?

Now lets say the stock falls and ur not yet been assgned, what do you have?
You probably looking at a loss of 20-50 % on your out-lay. correct? the calls premiums wont be much help!

Now my next question is this: How many WINNING TRADES do you need at 5% on what you have left, to be back at just b-even? dont forget you now only have around £15,000 of ur investment left. What if it goes sour again? you will soon be down to £5,000-10,000.
Where is your downside hedge/protection on your initial £30,000 investment.? and how many WINNINg trades do you need now??

bull
















o

 

[Effkay]

i'm not being rude here mate....but I really don't understand what you're saying....

 

[Effkay]

The point is if your a buyer of stock at 500p , you may be able to sell a call at 450p for 60p (this is a completely invented example). Therefore you have a breakeven point of 440p, below that you have no protection agreed, but then hopefully you won't have to face that!!! You also have a capped profit of 10p, which is okay I suppose as it's bought you 60p downside protection, or 12% protection.

As I said this is just an example and the prices are totally made up, but hopefully convey the point.

Therefore you want to be assigned, and you don't really care when it happens as all you want is your 10p

 

[bulldozer]

FFkay, Paris,
Your quote>> "When doing a covered call itm, it's not the premium that will save you really, it's the fact that the strike is well below your buying price, and that's what saves you."
===============================================================
Please xplain the above quote.

Simple question friend, what is your protection if the stock drops 20-50 % or more?

bull

 

[Effkay]

As I tried to put in my previous post, if the price falls below your strike you have no protection, unless you've hedged in some other way. But when picking the stocks you should have a bullish or at least neutral bias, and so it shouldn't really come to it, but if it does then you've done a bad trade!

 

[bulldozer]

FFkay,

Using your xample of your last post of 500p stock value.

Question: Lets say your going to invest £500,000 on a buy-write strategy how much do you think you are going to bring in by writing the calls.
If the stock drops by 50%, how much do you think your position is worth and you are still holding the calls too. Think about all these questions and my other posts too, ask paris/broker to help you.
we will continue in a few days time, hopefully both you and paris will have some good answers.

bull

 

[bulldozer]

Effkay, Paris,

Lets work on the scenario you put forward:

Stock at 500p, strike 450, prems 60 pts.

Now you need to buy 1000 [one thousand shares at a cost of £5,000] correct?

Now you can ONLY write one Call with that [£5,000] holding. correct?

Now you are taking in 60 pts=£600 on your holding strength of £5,000. correct?

Now stock drops by ONLY 20% to 400p. Your holding stock now worth £4,000. correct?

Now you get panic attack, blood presure up, heart beat races, cant sleep at night or day, and still you worry on the stock falling further.

Now you start to think what IF the stock held out at 500p and got assigned, I would have made 10 pts minus commisions on trade including assigmts costs, your left with 8 pts [or less] =£80 in one month on a investment of £5,000. [ is this a good investment plan? £80 profit on 5K ]

Now the stock is at 340 and you have decided this is a "bad trade" and you close out the whole thing. What are your loses? including costs? [ are U thinking? ]

Your loss is now 100 pts + costs. correct?=£1,000 + costs lets say £50 + a futher 5-15 pts, lets say 10 pts= total £1,150-00 correct? all this risk for a potential gain of £ 80. [novice stuff] Even TEN winning trades minus costs wont save you!

Now what if the investment was at £500K? What would you do? [facing a loss of 20-30 %]

Now how many Winning trades at_____ would you need to B-Even?

I can almost read your reply
Here is a clue to your next question: Found in these 3 words 3-4-4



bull