I was hoping to see if any of you could shine some light on a topic I cannot seem to get my mind around. I'm reading into using DITM leaps as a surrogate to stock ownership and writting near term ATM calls against it. My question comes with the scenarios of what happens at expiration if the near term is ITM. Jan10 30calls have about $3.10 time value so I'd hope that excersize is not the best option. if any of your have experience with TOS as the broker, that would help since this is where my acct is setup. any takers on this one?
If the short call is ITM just before expiration, you can buy it back, have it called away from you, which may leave you with a short stock position in your account. Or you could early exercise your leap, hold the stock and let that get called away, or you could sell your leap, presumably at a profit, as your short call is in the money, and et-cetera, etcetera. Personally, I would probably roll up and out -- buy back the short call and sell it for a later month another SD out. Anyone disagree? (I've done this on ocassional with some small trdes, and never bothered to see if it was the absolutel best strategy for dealing with a short call that goes ITM against a Leap. (My own Leap issue(S) is the wide spread that so many have and when do I sell or execute them.
didnt mention it above, but the option i was referring to were for QQQQ I do too think that rolling up and out would be the best option, but what if I'm not ahead of it. what technically takes place in the account. If I'm long options, and they deliver them short... what happens with my account balances and margin? again, sorry for the questions, but it could help spark a bit more in my research process to hear what you all have to say. thanks
You would be assigned 100 shares of QQQQ short for every contract you sold that would up ITM. (You don't own the stock, so it can't be called away from you at the strike price. Instead you get short stock at the strike price.)
I'm not a fan of using LEAPS for the long leg of a diagonal because a big move in either direction will cost you more than a midterm leg. Granted you pay a little more per day but a successful writing program will make up for that. I'm also not a fan of rolling a short leg of a spread (or covered call) up/out for a loss. You book the loss and carry the paper gain which can disappear. I'd sooner close the position or roll the long leg up as well, thereby booking some net profit (LEAP has higher delta). In order to book some net profit, you have to take action before the short leg gets well ITM - otherwise the near month option's delta can exceed that of the LEAP. While you are monitoring your spread's P&L, you should also be monitoring possible spreads that you might consider rolling your short leg to (the roll). As long as the spreads are widening, time decay is working its magic. If it starts narrowing, determine why.
To the OP: If you are set on this diagonal, why not use NDX instead of QQQQ. Then you don't have to worry about assignment issues. Also, maintain the same notional exposure that you would have with a CC and you'll be fine, except of course if we see a black swan.
All excellent points and I know the naked put has the same risk profile as the CC on paper. But somehow it doesn't seem as risky. Must be psychological. To follow up, any good boks on Leaps and covered calls that address some of the issues mentioned in this thread. I have a 15 year old Leaps book and that's about it. MacMillian's covered call book helpful?
nravo - I was talking to one of the option brokers at a recent Moneyshow and they told me that most people who blow up accounts use naked puts. Poor risk management I guess. . . I'm a fan of them myself !
I can see how the risk is the same with a covered call as a naked put. But I would suspect the risk profile would be better with covered leaps, as less money is at risk on the downside. Btw, the put sellers who blow are usually margined, not those selling naked but cash-secured puts.