Deep-ITM covered calls

Discussion in 'Options' started by ADLE, Mar 11, 2006.

  1. rcmcfe

    rcmcfe

    Thanks for your help!
     
    #51     Aug 16, 2007
  2. To add to majorursa's post, if your short call has some intrinsic value at expiry (0.05 or more) you will be assigned and end up with a short stock position. You have to be careful.
    db
     
    #52     Aug 16, 2007
  3. I'm confused about the facts. If the call is about to expire out of the money, how is it worth $2.50 at expiration?
     
    #53     Aug 17, 2007
  4. u21c3f6

    u21c3f6

    "I'm confused about the facts. If the call is about to expire out of the money, how is it worth $2.50 at expiration?"

    It isn't!

    Joe.
     
    #54     Aug 17, 2007
  5. c7b

    c7b

    Say I sell 1 call for 5.20 (receive 520 premium)...At expiration, the call is worth 2.50 and expires out of the money.

    What happens if I do nothing...? Do I keep all 520 received as premium. Or do I keep only 270 (520-250)? I know I can buy it back before expiration, but I'd like to know how much premium I keep if I do nothing at expiration.

    Thanks.

    ..........................................................................................................

    Hi all,

    I'm new here and hoping to learn more about options. Let's take the above example, sell call for 5.20. If at expiration the call is worth 2.50, what will happen if I do nothing? Do I keep all the 520 or only 270?

    Do I have to close the position?

    Thanks.
     
    #55     Aug 12, 2010
  6. rew

    rew

    So you're saying that at expiration the call is 2.50 in the money. Just before expiration you could buy back the call for a bit over 2.50, making close to 270 net. If instead you actually let the call expire ITM it will automatically be exercised and you will be short 100 shares of the stock, sold at the strike price of the call. You will keep your entire 520 premium. If the stock price doesn't change over the weekend you will have a 250 loss in your short position Monday morning.
     
    #56     Aug 12, 2010
  7. piezoe

    piezoe

    Do Not Do this> Don't have time or inclination to explain why now. Perhaps some of the option experts here will explain it, but basically if you're going to do this sort of thing at all, and I don't in general recommend it, you should be selling the front month atm call. Please be aware of the risks, and note what someone else here told you, i.e., covered calls are synthetic short puts.
     
    #57     Aug 12, 2010
  8. c7b

    c7b

    rew,

    but if it's a covered deep-in-the money call, there won't be a 250 loss because it is covered with the stock in hand. So, i should be receiving 520 premium plus the strike price. Isn't this right?

    Thanks. :):)


    piezoe,

    please explain, and thanks. :) :)
     
    #58     Aug 13, 2010
  9. Well you can buy SPY at 108.58 and sell the September 45 Calls :) :)

    Do the math.
     
    #59     Aug 13, 2010
  10. rew

    rew

    If you bought the stock and sold the ITM covered call then of course your stock will be called away and you won't be short any stock. But your stock is sold for less than you paid for it, so net you will make the time value of the call -- which is the same as the time value of the put at the same strike price. So you could have simply sold an OTM cash covered put instead of doing the buy-write, and would pay less on commissions.
     
    #60     Aug 13, 2010