But its extrinsic value is zero. And any intrinsic value would be covered by the stock bought right at the strike price or slightly below (right before it hits the strike price). I am a newbie, but I think I am right about this.
If you're trying to achieve income by selling call options you won't get any if stock advances above the strike price.
That's fine. But you didn't explain why. Could you explain the mechanics of why that should be the case? Doesn't it depend on how much time decay has taken place between the time one sells the call and the strike is hit? Granted, if the stock jumps up the next minute you sell the call, no amount of delta hedging will keep you from losing money, if not the whole premium, then a whole lot of slippage and commissions trying to delta-hedge all the way to expiration. Do you mean you can't derive income from selling options without betting right on direction on average? Because an occasional loss doesn't necessarily mean "you can't derive income from selling options". Anyway, could you please explain your statement in more detail?
Your main risk then is that the stock moves strongly up and hits the 590 strike, the point where you say you will buy the stock. At this point, you have a covered call position with ATM call options that you sold for probably much less than it's worth now. The whole risk now is to the downside, and there's a lot of downside, so how do you plan to protect yourself? Another risk is the gap risk. If GOOG moves up and closes slightly below 590 and then gaps up a lot, you might buy GOOG stock at a price higher than 590 with the buy stop order.
Yeah, that part I already thought about. One would have to dabble in "well-behaved" stocks. Biotech, for example, would be a bad choice, I think. Thanks for your answer.
I just don't understand the concept of hedging a trade like this. You should always be able to ask yourself "If I was flat, would I enter into this position?" If the answer is Yes, stay in. If the answer is No, get out. Another way to think about it is, Would you invest more in the position if you spontaneously had more money in your account? Let's say you sell your option at $10 because you think you have an edge and you're odds say you're going to make money. Oops price moved against you, now your option is $1. Your rich aunt dies, so sad, but she left you $100. Would you sell another option at $1? I think you would say Oh hell no, price has already moved against me. Then WTF are you doing in the position?!? How many times have I heard someone say "I got in at $10 then it went to $20 and now it's back down to $10. If I didn't already own it, I would never buy it." If you don't get it, well, I'm not going to tell you. I don't tell my Aunt Cathy to sell either. She isn't looking for investment advice, she's just making conversation and looking for a shoulder to cry on.
Yes, you keep the premium, but in the above scenario you will be selling your delta at the same or lower price than you bought it. So you will, at best, spend your premium on commissions.
It makes no difference how high the premium goes as long as the stock is bought at the strike (1 round lot per naked call) - the income sought will be attained. Breakeven is strike plus premium so one can buy the stock up to $194.40 If stock is bot below 190, the gain will be larger, if assigned.