Hello, I am new to options. I am interested in a selling a covered call on a stock that I own. The bid/ask is $1.45/$2.00. What is a realistic premium to expect? I'm not sure if I should be able to expect the full ask price of $2.00, or maybe something in-between the bid/ask prices ($1.75, etc.). Thank you.
Are you sure you want to get involved with options that are that illiquid? Only you can determine the price you are willing to sell your option vs where the stock is trading. You need to pick that price as the worst you are willing to accept. Then, if it were me, I would enter an order to sell your options on the offer. Then every few minutes I would drop my limit the minimum price increment until I get to my worst price. That is a good way to find liquidity. An automated MM will play when they get their edge. I personally would avoid entering a trade on options that never trade. A market of 1.45/2.00 can be costly to enter and exit.
Any fill on that market south of 1.70 is terrible. Even if MM's are fading the real value, any fill north of 1.80 is great but unlikely. You should expect to get 1.75 best... 1.60 at worst if the underlying is as illiquid as the spread suggests.
You are making the assumption that the midpoint is fair value. That a MM can buy the options $0.02 below the midpoint and want to take risk on the trade. That is not how this works in my experience. Each MM will have their own values based on market conditions and where other options are trading. We don't know enough about the option, the underlying, etc to make any educated guess. It is likely with markets that wide, there are little or no customer orders to trade with this order.
You could get all caught up in a debate about what fair value is as well as should you get involved in illiquid options. I'd offer a somewhat different take. If you're selling a covered call, I'm going to assume that you are willing to hold the stock but you are also looking for some premium income AND you are willing to sell the stock at the strike price should it appreciate to that price. If so, then this is more of a transactional event than fair value consideration. Given the above and if you get your entry price then liquidity is not a factor unless you are not willing to hold the stock long term. Then, lack of liquidity might give you a haircut on a must exit position. IOW, it's a binary decision if it's buy & hold or be assigned. In terms of the premium, determine the lowest sale price (strike + call premium) that will make you happy. Suppose that number is $1.70. Enter an order to sell the call at a good fill price. Perhaps $1.85 ? Let the order sit for awhile and drop it a nickel periodically until you get to your $1.70 floor. Your primary consideration is how much downside protection as well as ROI the premium offers. Don't get caught up in trying to get the perfect price or the last nickel available and miss the opportunity to get $1.70 or whatever premium you find acceptable. You'll regret chasing that nickel if there's no fill and the premium drops to $1.00 x $1.50 AFAIC, a realistic premium is something in the vicinity of the mid point.
If you have the time start by quoting a nickel below the current ask and wait to see what happens. Depending on the liquidity of the stock option in question this goes from a minimum of 5 mn to a day or so. Gradually step down - not infrequently you will see either the bid dropping below yours or the ask creeping up. If you are patient and the stock option is not very liquid you might even get the high end but I would aim for 1.85$ or thereabouts to close faster.
I am new to options too and often trade thinly traded options. Here are my experience: 1. In general my target price, either buy or write is mid of bid/ask. I "walked" my price up from below mid to about mid to get my fill when bid and from above mid to about mid when ask. 2. Whether I can get my price depends on many factors, usually right after market opens and a lot of activities, I could often get a better price than mid. Near close, it is hard to get a better price when things are not moving much. 3. It also depends on whether the calls are OTM, ATM or ITM. Too far OTM of ITM usually meant I won't get the price I wanted, especially DOTM. 4. Make sure your know your counter party. With retail on the other side, your mid of bid/ask could be off by a mile. Some words of wisdom and coaching from my coaches here: 1. Simple options, buy or write, you are betting on the direction of the underlying and theta is not an edge. 2. Be careful of gamma, if you write OTM. 3. For us new to options, it is therefore better to go slightly longer time frame to give our bet a little more time to develop. 4. You need to decide if you are doing buy-write or naked. If your intend is to not sell your holding, you effectively are writing naked options and the entry and management of naked vs buy-write could be different. 5. Read up on posting by Handle123, drcha, Maverick74, JackRab...... Best to you.
Right, my initial assessment was based on a t/v of ~1.725 leaning on the b/a, but I qualified my guidance with the note about the MM potentially fading the real value (ie: t/v 1.85 but making 1.50/2.00 to force offers lower). I still think my assessment holds true that any fill below 1.70 is terrible, 1.75 is lucky, and anything at or above 1.80 is a gift.
"You are making the assumption that the midpoint is fair value. That a MM can buy the options $0.02 below the midpoint and want to take risk on the trade. That is not how this works in my experience. Each MM will have their own values based on market conditions and where other options are trading. We don't know enough about the option, the underlying, etc to make any educated guess. It is likely with markets that wide, there are little or no customer orders to trade with this order." Robert is spot on - assuming midpoint is fair is bullshit, it's just easier to arrive at than actually doing some real analysis. It's also just lazy given a number of good tools on the internet and brokerage sites.