I am just starting to paper trade. My research and reading to date indicated that covered calls should have a strike price above the current trading price. However, I am looking at two different trades. I would like to confirm what would be likely to happen in the second trade listed below in the real world. 1) buy 100 shares JCOM @ current price $60.55 (+4.95 commission), and sell 5/20 $65.00 call @ $1.45 (bid) (less 0.50 commission). This is the type of trade I have been reading about. It is pretty straight forward on outcomes. 2) buy 100 shares JCOM @ $60.55 (+4.95 commission), and sell 5/20 $60.00 call @ $4.70 (bid) (less 0.50 commission). This seems too good to be true. Is it unlikely that I would assigned in the near term with call prices high? How close to expiration date would assignment be likely? Generally speaking, how close does trading price need to be to strike price for assignment to be likely, .01? .10? etc? Is the second trade a sucker bet or the real deal? Any helpful answers or other advise will be appreciated.
Don't over think this. I pick stocks/etfs that i want to own and consistently write calls 1 stdv out from the market price. I use an excel sheet that I put together using black scholes just to check the pricing and be sure Im in the ballpark. Of course I've had prices move upwards through my strike but that's to be expected. Since I want to keep my positions and not get called away I roll them. Not saying that this strategy is the most efficient but it works for me and doesn't require a ton of maintenance. I use IB because it makes writing covered calls very cost effective in a registered account based on their comission structure. Don't be too scared, write some calls and just buy them back if you want to keep your stock. Found its been a great way to increase yield in flat/down scenarios.
The first issue for doing a buy-write strategy is the stability of the stock. If the stock is very stable you won't get much for your calls (low volatility = low options premium) but the probability of the stock itself tanking is low. If the stock is very unstable then you will get a boodle for your calls but the stock has a high risk of tanking. http://stockcharts.com/h-sc/ui?s=jcom http://finance.yahoo.com/news/j2-global-citron-report-attacks-193507427.html Zacks ranks JCOM a buy but they've been wrong before. What happens if JCOM DOES fall to 'single digits' ?? You know, of course, that a covered call is the same as a short put?? http://investorplace.com/2011/05/selling-puts-vs-covered-calls-which-is-better/#.Vwr4UaPSmig
Agree with @oldnemesis. Should have noted that I mainly write index etf calls or certain stocks that I follow closely and have a general idea of implied vs realized vol on the stocks I write against. The liquidity in Canada really sucks for options on single name stocks so I'm careful about the names I hold and write against. Just another note that I never write more than a month out to take advantage of exponential theta decay. Best of luck to you!
Thank you both for your replies. jo0177: I have been considering up to 40-45 days in an effort to reap slightly higer premiums. I do understand that the decay is faster in the shorter <=30 day time period. olsnemesis: Points well taken on the risk factors. I had not gotten to the point of researching news and/or fundamentals at the time of my original post. I was tunnel visioned by the great disparity between the ITM and OTM pricing at only a $5 spread in strike prices. They seemed to be upside down. Apparently the market caused this in the light of the news you provided as links in your post. Thanks again.
I agree with this, to some extent -- you only have so much control ...you just have to let loose and go with it... for better or worse. Think on your feet
I agree with that. I view this as similar to playing poker. Don't use scared money, and don't over think things which i can't control. ...AND... Remember that I cannot bully or bluff the market!