Best to sell an ATM, ITM or OTM covered call?

Discussion in 'Options' started by crgarcia, Jul 20, 2009.

  1. Does it makes any practical difference?
    (as long as it has decent pricing, and enough liquidity?)
     
  2. What are you expecting to get out of the covered call position? The maximum amount of time premium is going to be in the ATM strike. The further you go in or out of the money the less you’ll take in via time premium.

    What exactly is your goal in the position?
     
  3. To generate income.

    I'll be selling covered calls on good dividend stocks for years.

    I want to withdraw between 5-10% per year.
    Of course, if stocks go down, my account will temporarily lose value, altough less than a long stock.

    I can tolerate watching my account lose some value, as long as it generates income.
     
  4. What is the point of owning the stock if you are gonna sell an ITM call? or is that just me??
     
  5. Sorry, I meant a slightly ITM
     
  6. There is no 'best.' It depends on your needs, but I strongly recommend that you sell ITM calls.

    Your goals are modest - only 5 to 10% per year. You that level of profit, you want to take as little risk as possible.

    If you are writing calls on 'good dividend' stocks, then these are likely to be not very volatile stocks with relatively low option premium. The ideal situation for you is to write calls a point or two ITM - for a stock priced 30 to 50.

    That would give you some time premium as your reward for writing the call, and, depending on when the stock goes ex-dividend [the further away from expiration, the better], a good chance to collect that dividend.

    Mark
     
  7. wow.....5/5 so far.......guess tranny is the answer!
     
  8. It's just you.

    The point is to make money.

    Think about the equivalent position - the naked put. If you were to sell those, would you sell ITM puts? That's the same as writing OTM calls.

    Or would you tend to sell OTM puts (as would most)? That's equivalent to writing ITM calls.

    Mark
     
  9. Well the way you casually mention 5 to 10 % a year as if that’s a snap with no risk is a red flag to me. Also you say you’ve been doing this for years and now you’re asking a pretty basic question. By the way the calls all have the dividend priced into them so if you have been selling covered calls on Dividend stock to collect the div you’ve been short changing yourself.

    What is selling the ITM call going to do for you? The deeper in the money the call is the less you’re going to collect and the greater the odds you’re going to lose your stock.

    By definition the at the money call has both the greatest amount of time premium and a 50% chance of the stock being called away at expiration. The further out of the money you go the lower the risk of being assigned at expiration and of course the lower time premium you collect. Its simply a function of how much upside you want to give up in order to collect a few bucks.

    Forget using covered calls and calling it protection for a downside move in the stock. The money in premium you’re going to collect is not much of an insurance policy in a market sell off.
     
    #10     Jul 20, 2009