"Is this likely on a weekly expiration? I mean im sure it is but not very probable right?" The premium you receive will be reflective of that probability/risk.
I feel like I would be trying to overcome theta and force trades. I am playing around with the opposite - sell ATM straddle on volatile stocks. Then try to convert it to covered call or covered put. Since this is a bull market, I am more comfortable with ending up owning shares, so I essentially trade “covered straddle“ Far from having this figured out though, so playing with insignificant size. Trying to get some “income” going during slow times.
So you will be foregoing all potential profit just to cover the call? But the problem is, like someone else pointed out, what if the stock price, after you've bought it, goes back down and your call is again OTM? Then you would be stuck with a stock that's tanking for potentially lot more than your call's premium can cover and you have no way to hedge it because nobody will be exercising your OTM calls. And if you decide to hold the tanking stock, you will be forced to sell the call at lot lower premiums at lot higher strike price to remain OTM because your stock was bought at lot higher price before otherwise you are going to run the risk of suffering a loss if you ever get assigned. The only potential profit you will be earning would be the premiums. Is it worth it? That's for you to decide.
Here is the deal. Hes selling a relatively cheap OTM call.He never mentioned implied vol.. He's willing to let his Delta go from apx 10-20,to. 50 without hedging.Instead of getting flat at the short strike,he now decides to get long 50 delta's,heading to 100 if the market reverses.. Makes zero sense..... If anything stop yourself out when the call goes up X percent or buy in partial delta's on the way up..Flipping from short 50 delta's to long 50 delta's at the short strike is a recipe for disaster
@taowave, the way I understood his question is that he simply wants to delay buying shares into a covered call until stock actually reaches the strike. Once the call becomes ITM, he will buy the shares so that he can get assigned. What is wrong with that from the perspective of covered call strategy (assuming he can get the shares at the strike)?
He has no plan and is taking large risk to make peanuts.. First he's naked short a cheap call,waits for the stock to rally 10 to 15 percent to rhe short strike and then arbitrarily flip from short 50 delta's to long 50 delta's by sythetically being short the,ATM put.. Whats his plan if the stock reverses??? Sell a call to be in a cheap synthetic straddle?
Well, I can't speak for him, but to me, it's an "income" trade. Let's say one wants to establish bear call spread. Why not open the short leg and then wait and see where the stock is going? If it tanks, great. If it bounces around, still good. If it rips, buy the shares instead of buying the protective leg. The only problem is if the stock gaps. It's a variation of BuyWrite strategy, no?
Your limit orders won't mean anything when the stock gets halted. Don't think it can happen? Take a look at 7/29 KODK (which had like 5 or 6 halts in a couple hours) or 9/23 SPI (1400% gain in a day at one point). Both went to the moon and gave back most of it on the same day. Also, can you actually short the naked call? Finally, if you put in a "limit" order to buy at the strike price, you're going to be filled immediately (stock at 50, strike at 55). What you are talking about is a "stop-limit" order. They work great in an orderly market...and then when it gaps, your order sits unfilled as it goes to the moon and gets picked off when it goes in the opposite direction.
Not saying I like your strategy,but at least you are capping your risk. He's taking risk for very little return,and instead of covering/hedging,he arbitrarily flips the other way and goes short the put after a 10 to 15 percent rally.... It's wrong on every level
So, how did that trade go? You may have noticed that the call stays stubbornly high from the elevated volatility while the theoretical (over-)hedge suffers the full delta of the position. e.g. Convexity to the downside. Naked call that you hedge in quantity by buying the underlying = covered call = naked put.