To repeat, check the prices in real time. The bids of those ultra deep ITM calls trade below parity, reflecting the future dividend(s). You will not be able to put the position on at these prices.
OK, this is trading hours now. As I write, SPY is at 122.02 . Dec 2013 $70 call is at 53.23 Bid / $54.04 ask. I put in a virtual buy-write limit order last night for SPY and this covered call with a $69.30, and it executed. Not sure if that counts since it's virtual But my virtual execution includes $0.70 of time value.
My limit order was $69.30 . Virtual execution was at 9:31:15 . SPY at $123.85. Dec 2013 $70 call at $54.86. Net : $68.99 . So that's actually $1.01 of time value. More than 1 SPY quarterly dividend . The position currently shows a value of $68.22 . So spread is about $0.77 . Delta is shown as being very slightly under 1 right now. I wonder if this would execute as a real trade. I'm tempted to fund one of my brokerage accounts and try it.
1) the delta of that option you quote is NOT 1. That deep but so much time out, should be around .95 I would think 2) you are short gamma 3) you are short vega - what if vix spikes? 4) dividends are priced into the option premium 5) cost of carry as others have said For another perspective of the risks, ask yourself would you sell a Dec13 70 put naked on SPY? If not, why not? Because it might gap down? See threads on naked index writing (sometimes called picking up pennies in front of a steam roller) I am not bashing the trade btw, just stating some facts. Suggest you track the b-a of both the put and call on exdate-1 and exdate to learn more. Also watch how the OI changes overnight (more relevant to near term options). I always thought there should be an opportunity on the tax treatment of the div (15%) vs the full ST cap gains on the added option premium in the puts, but have yet to really think about a way to take advantage of this. Asset swap maybe⦠Anyway, my 2c and good luck to you.
You are right, it went down significantly to .8683. It was 1 monday and 0 .98 last night when I placed the limit order. But market went down. It could go back to 1. That probably explains the execution. I tried the same virtual trade with some $20 calls and $40 calls, but no luck. That's only a problem if I want to unwind just during the time of that VIX spike. There are 2 years before expiration, plenty of time for VIX to go up and down. Naked ? No. Cash-secured ? I might. It's a little more than pennies, $5.50 out of $70 is 7.8%, over 25 months, or about 3.7% on an annual basis. Not a huge return , but not awful either. Similar yield to the covered call case if also held to expiration. The call is much more likely to be assigned early, though, as the price is trading above $70. The put (if I'm correct) would likely never be assigned, since the shares are trading above $70. Being assigned early on the call would increase my yield, on an annual basis, as it would cause me to pocket the time premium early, freeing up my shares, and allowing me to make another trade. It depends how soon the assignment would happen. I believe the sooner, the better, since the time premium is greater than 1 dividend. For example if I get assigned in one week, I pocket the $1.01 of time value. It's a 1.4% return, but on an annual basis it's a 76% return So for that reason, the covered call looks more attractive to me. They both have the same return at expiration, but one has potentially higher return per day, through early assignment. Will do. Seems the logical way to avoid this would be to trade it in IRA/Roth IRA/401k and worry about taxes later (or never, with the Roth). No margin of course, but I would not use it anyway.
In the spirit of this thread, I did the PRU covered write dividend play today, we shall see if I get exercised...probably will.