Covered Calls

Discussion in 'Options' started by bjn201, Jul 24, 2013.

  1. 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!
  2. kapw7


    I think your maths are right. (Ignoring the effect of interest rate).
    If you get a negative price - in theory you have an arbitrage opportunity. However in this case I guess it is so small that you cannot take advantage of it(?) Get the quote for the put price too and plug the values in the put-call parity equation.
  3. toonerdy


    You have the signs reversed in your calculation. Do you really think your loss increases if the amount you get paid increases above $398?
  4. It's just bid/offer...
    Wisard likes this.
  5. Covered calls ought to be, in general, ATM or OTM. You want the call to expire worthless. Selling covered calls that are 7% ITM, as in your example, and have only a couple days until expiration won't give you a whole lot of premium, and the spread and commissions may completely negate any potential profits.
  6. FXforex


    Covered Calls = Naked Puts

    You are better off just selling naked puts with cash in your account to buy the stock if necessary.
  7. Shouldn't it be cash secured put vs naked put if you have cash ready to buy the stock if assigned?
  8. FXforex


    Six of one or half a dozen of the other, which ever you prefer. :)