Looking to sell a profitable stock position: OTM, ATM, or ITM covered calls?

Discussion in 'Options' started by 1a2b3cppp, Apr 13, 2011.

  1. Say I bought 100 shares of QQQ @ 50 back in the day. That cost me $5,000.

    Today QQQ, closed at $56.85, for a total value of $5,685.

    Let's say I'm done with my QQQ position. I could sell it and make $685 minus commissions.

    I'm wondering if I could make more money selling it with covered calls?

    I'm assuming OTM covered calls are out because that would require QQQ going up to the strike price in order to close my position, and that may not happen (eg. QQQ could begin a downtrend tomorrow).

    I could sell an ATM option (assuming QQQ was at an even dollar amount) and probably make the premium + the gain on QQQ right?

    What about an ITM option?

    Right now I see that June $54 QQQ options are going for $3.63 (bid). So I could sell one of those and bring in $363, but I assume my position would immediately be exercised at $54, right? So does that mean my total profit would be:

    ($5,000) - buying the shares at $50
    $363 - selling the option
    $5,400 - selling my shares to the option buyer at $54
    $763 (minus commission)

    Is that math right?

    So does that mean that if you're looking to unload shares of stock, it is (sometimes?) better to sell an ITM covered call to close out the position rather than to just sell your stock regularly?

    What about a September 54 call? They are $4.66. I'd make like $103 more that way, wouldn't I? And December 54 calls are $5.48.

    I guess the question becomes "what are the chances of an ITM option being exercised by your buyer?"

    What about selling a Dec 42 covered call for $14.25 (bid)?

    ($5,000) - original purchase
    $1,425 - option premium
    $4,200 - selling my shares to the option buyer

    Oh wait, that's worse than just selling the shares outright. lol.

    Do I have the math right here? Is this pretty much how you do it?

    - Have a stock you want to sell that has already gone up in value
    - Find an option where selling ITM calls will make you more money than just selling the stock normally
    - Enjoy free money?

    Or am I missing something?
  2. jkgraham


    If you sell the OTM Calls you get to keep the premium if the option is exercised or not. You could sell the near month OTM Call option every month until it sells.

    Most of the time (I don't know the %) ITM options won't get executed until the expiration date. So if you sell the December Call options, you'll probably have to hold the shares until Dec.
  3. No, the option will almost certainly NOT be exercised immediately - even in the June options you are showing for the example.

    QQQ is 56.84
    The Jun 54s are 3.63 as you say
    There for there is 56.84-54=$2.84 of intrinsic value
    That leaves 3.63-2.84=$.79 of time value.

    You can be virtually certain that won't be exercised immediately. Therefore your would continue to hold your position and if QQQ fell, you could still lose out.

    Of course, the Sept and Dec options have even more time value.

    You have to remember that exercise is only likely when there is little time premium - usually the option has to be either very near expiration and/or Deep in the money - i.e. if you sold a QQQ 40 strike call right now.

    It is not that easy to get extra money selling stock I'm afraid!

  4. Thanks. What are the chances of a ITM option being exercised at expiration?

    In the event that it doesn't get exercised then I can keep the premium AND sell the shares myself right?
  5. I believe that any options that are even slightly ITM are exercised now at expiration under the rules of the option boards, unless requested otherwise by the owner.

    Here is a blog post about this topic:


  6. If your short options are ITM at expiration you will be assigned.
    You can be assigned even if they are OTM. This is unlikely, especially for something like the QQQ, but it could happen (if somebody really wanted the shares for a dividend, for example, they might be willing to pay up a couple of $0.01 to get them).
  7. spindr0


    If the option trades below parity, it's likely to be exercised early.
  8. unfortunately there is no free money as usual.

    that extra (763-685) corresponds to the risk your stock goes below 54. Suppose you sold the ITM 54 call for for 363 when stock is at 56.85. Then at option expiration, stock took a dive and closed at 52. In that situation, option buyer won't exercise the option, you will keep 363 and have stocks worth 5200. Your total profit then becomes
    363+5200-5000 = 563 which is less then guaranteed profit of 685 (realized if you sold your stock at 5685. )
  9. spindr0


    The best thing to do is unknown since you have no clue what the underlying will do b/t now and expiration.

    Here's the deal with covered calls. Your performance is worse with them if the underlying goes above the strike + premium received (versus holding the UL) and worse if the underlying drops below the current strike price less the premium (versus selling the the UL). Everything in the middle is gravy.
  10. That makes sense.

    So if it expires ITM, it works out best for you as long as it's not so ITM that you'd have more money had you just held the stock and sold them at the current price.

    If I have QQQ with an average cost of 50, and it's currently trading at 55, and I sell a 56 call, and then at expiration QQQ goes to 200, I didn't make as much money as I would have had I not written the option :D
    #10     Apr 15, 2011