Yes I agree with 1 & 2, and appreciate the advice. I guess what I’m thinking is that this “insurance” would be implemented before you get to a loss point, as price approaches CC strike. So the concept would be closer to point #2, but, there is a premium received from CC position, but since the stock price has dropped, there is more theta on the CC, so if you close the positions out, would take a loss having to buy more time value back than you sold on CC. So I guess you could say you’re in a loss position at this point, kinda...? So I’m trying to insure my position via sacrificing the premium that would be gained if everything stayed as-is until expiration. Which I’m hoping there is a better cost effective way than outright put, because the outright put has more time value on it right now as well since stock price has dropped close to CC strike point.
what I don't understand is... in a covered call strategy the strike of the short call should be the maximum profit point.. are we talking about the same thing? Or are you writing "CC strike point" while actually what you mean is "breakeven point" ?
This CC would be an in the money covered call, should have mentioned that earlier, sorry. So it in itself was an insurance to downside protection. In the graph above, the stock price would be between the X and the arrow, but closer (and moving towards) the X.
Ok now it's clear. Buying a put would be an insurance against a sudden violent downward move, but the situation that you describe is more like a slow drift. In that case buying a put will do you more harm than good. If you expect the stock to go down a bit but then sit on some support level for a while with the fundamentals unchanged and no catalysts in sight, then you could double the short calls ratio (so you go to 100 shares /2 short calls) end end up with a synthetic short straddle.
Well... I definitely want downside protection for the potential big drop thru my strike. This is a pretty near term time frame so it could get pricey quickly. I do like the idea of the additional short call, but that may still result in unlimited downward risk. I’ll have to ponder on that one a bit more.... almost thinking now I could sell an OTM put and the buy a put at the CC price to help with the cost of it.
Simpler to just buy an ITM call spread rather than an ITM covered call. You'll have less premium collected but now you have loss capped. Your margin requirement will be much lower so you can take on more call spreads compared to the covered call.
1) If you do that, the resulting structure would have the same risk graph of a covered call. You should study a bit synthetics, in order to avoid creating a complex structure that achieve exactly the same result of a simpler one but with 3X commissions and slippage. 2) you can go to www.optioncreator.com and play with their analyzer until you find a structure that fits your view.
@dickey7, You totally ignored the most sensible advice given to you by one of the experts on ET, @lindq. By closing your covered call position, you are totally protected on the down side. If you still have very strong opinions in the underlying, there are lots of possiblities opening up to you after that.
I agree that there is a time to close out the position as a mitigating control. I guess the reason I wouldn’t want to do that in this scenario is because it would result in a loss. Whereas, there is a possibility that price stays the same or moves upward and I would have a gain. But, I would be willing to sacrifice my gain potential to guarantee there is not a loss, with full downside protection. Hope that makes sense. To recap. This is a CC position that was sold in the money for a small premium, and the price has dropped towards strike. So their is now more time value on the short call, that if I purchased it back would result in a loss. And as mentioned, if stock price stays put or moves northward, would have the gain. Short time frame as well.