Covered Calls FTSE 100 index

[bjn201]

Hi Everyone,

I understand the theory of covered calls and have been looking into implementing this strategy in the following way:

Buy FTSE 100 cash index
Selling (writing) An In The Money (ITM) FTSE weekly call option

I have been researching this on IG markets (spread betting) since this is my preferred platform.

However I have looked at 10 different ITM options, and none of them are profitable to open the position (will give an example)
Through all my research I have not come across this or any mention of the below problem:

Real life current Example (live data)

The weekly 6200 call option is priced at. 398 : 402 since we are selling we get the lower price)

Current FTSE cash price: 6600

Therefore loss on opening is : (398+6200) -(6600) = -2??

This would give a total value of the option less than the intrinsic value of the option?! None of the theory I have looked at mentions that the option would ever have effectively negative extrinsic value??

All of the weekly calls (even ATM) have similar pricing issues!

What is the correct profit formula in the above example?

Thanks for your help traders! Any real life current examples you could give would be great!

 

[Martinghoul]

Well, remember one key point... All the theory and examples you have read that refer to notions like "intrinsic value" always talk about the "mid" price. There really isn't any good reason why anyone in the mkt should pay you more than 400 for the 6200 1 week call. If someone offered them to you at 405, say, would you agree to buy them? That's for the DITM stuff...

This really shouldn't be the case for the ATM options, so there could be some funny IG pricing happening there. What are the specific details for the ATM case you're seeing?

 

[bjn201]

Well, remember one key point... All the theory and examples you have read that refer to notions like "intrinsic value" always talk about the "mid" price. There really isn't any good reason why anyone in the mkt should pay you more than 400 for the 6200 1 week call. If someone offered them to you at 405, say, would you agree to buy them? That's for the DITM stuff...

This really shouldn't be the case for the ATM options, so there could be some funny IG pricing happening there. What are the specific details for the ATM case you're seeing?

Here are some ITM/ATM/OTM CALL options details: for market level: 3314.5

Strike Sell price
6520 96.1
6540 78.1
6560 61.2
6580 45.7
6600 32.1
6620 21.2
6640 12.8
6660 6.7
6680 2.8
6700 0.6


What is the correct formula to work out covered call profit and breakeven on these?

Thanks!

 

[Martinghoul]

Here are some ITM/ATM/OTM CALL options details: for market level: 3314.5

Strike Sell price
6520 96.1
6540 78.1
6560 61.2
6580 45.7
6600 32.1
6620 21.2
6640 12.8
6660 6.7
6680 2.8
6700 0.6


What is the correct formula to work out covered call profit and breakeven on these?

Thanks!

What's the expiry? Also, these are for the index underlying (i.e. IG's own daily FTSE index product) or the FTSE futures? Mkt level 3314.5?

 

[bjn201]

What's the expiry? Also, these are for the index underlying (i.e. IG's own daily FTSE index product) or the FTSE futures? Mkt level 3314.5?

Epiry is the 26th July, i.e. Friday, they are weekly options. the market price is correct at those strike prices (screen captured). and the price is the ftse cash.

N.B. No assignment will actually occur, everything is settled in cash since thisi s spread betting.

Surely the expiry date is irrelevant for computing the profit loss? I have come up with the follow data: Is this correct?

Current market level 6614.5
Call option
Strike Sell price max profit BE Price of underlying
6520 96.1 6616.1 1.6 6518.4
6540 78.1 6618.1 3.6 6536.4
6560 61.2 6621.2 6.7 6553.3
6580 45.7 6625.7 11.2 6568.8
6600 32.1 6632.1 17.6 6582.4
6620 21.2 6641.2 26.7 6593.3
6640 12.8 6652.8 38.3 6601.7
6660 6.7 6666.7 52.2 6607.8
6680 2.8 6682.8 68.3 6611.7
6700 0.6 6700.6 86.1 6613.9

 

[Martinghoul]

Epiry is the 26th July, i.e. Friday, they are weekly options. the market price is correct at those strike prices (screen captured). and the price is the ftse cash.

N.B. No assignment will actually occur, everything is settled in cash since thisi s spread betting.

Surely the expiry date is irrelevant for computing the profit loss? I have come up with the follow data: Is this correct?

Current market level 6614.5
Call option
Strike Sell price max profit BE Price of underlying
6520 96.1 6616.1 1.6 6518.4
6540 78.1 6618.1 3.6 6536.4
6560 61.2 6621.2 6.7 6553.3
6580 45.7 6625.7 11.2 6568.8
6600 32.1 6632.1 17.6 6582.4
6620 21.2 6641.2 26.7 6593.3
6640 12.8 6652.8 38.3 6601.7
6660 6.7 6666.7 52.2 6607.8
6680 2.8 6682.8 68.3 6611.7
6700 0.6 6700.6 86.1 6613.9

Expiry is irrelevant for the final P&L, indeed... However, it can give you an idea of whether the time value for the option is sensible or not.

So, firstly, looking at this, I am not sure I see what the problem is. You can sell the ATM(ish) call at 21.2. Most of the value in that is "extrinsic", so you don't have the problem that the DITM call had in your original post.

The last column in the table you have created above. Is that the breakeven price of the underlying for the whole covered call strategy? I.e. where you buy the underlying at 6614.5 and sell the call? If so, looks correct at first glance...

 

[bjn201]

Expiry is irrelevant for the final P&L, indeed... However, it can give you an idea of whether the time value for the option is sensible or not.

So, firstly, looking at this, I am not sure I see what the problem is. You can sell the ATM(ish) call at 21.2. Most of the value in that is "extrinsic", so you don't have the problem that the DITM call had in your original post.

The last column in the table you have created above. Is that the breakeven price of the underlying for the whole covered call strategy? I.e. where you buy the underlying at 6614.5 and sell the call?

Ok I understand that, it appears that your original analysis about DITM options having no "extrinsic" value in the original instance is correct.

The last column should be the price the FTSE can drop to and I would still remain in profit, correct?

so e.g. the 6620 Call:

The Breakeven price should be the current price less the premium
= 6614.5 - 21.2 = 6593.3
i.e. The FTSE can fall to 6593.3 and I would still remain in profit.

Is this analysis correct in your opinion?

If so, I could simply sell my underlying unit in the FTSE at that price if it falls to it (the FTSE is likely to move by 21.2 points in 2 days to expiry!) and buy back the call at a lower price to exit the trade.

Hence why I was originally interested in the DITM call options, since it would give me much greater leeway in the movement of the FTSE so I do not need to exit the trade and can take my profit.

Have you any thoughts on this strategy?

 

[Martinghoul]

Ok I understand that, it appears that your original analysis about DITM options having no "extrinsic" value in the original instance is correct.

The last column should be the price the FTSE can drop to and I would still remain in profit, correct?

so e.g. the 6620 Call:

The Breakeven price should be the current price less the premium
= 6614.5 - 21.2 = 6593.3
i.e. The FTSE can fall to 6593.3 and I would still remain in profit.

Is this analysis correct in your opinion?

If so, I could simply sell my underlying unit in the FTSE at that price if it falls to it (the FTSE is likely to move by 21.2 points in 2 days to expiry!) and buy back the call at a lower price to exit the trade.

Hence why I was originally interested in the DITM call options, since it would give me much greater leeway in the movement of the FTSE so I do not need to exit the trade and can take my profit.

Have you any thoughts on this strategy?

Well, let me respond to your question with a question... Do you expect this strategy to systematically make money and why?