If the underlying stock price rises significantly, how does rolling the CC further out help? 4:15 It would seem that extending the contract expiration would only increase the probability of assignment by allowing _even more_ time for the stock price to rise.
In the long-term maybe. In the short-term, rolling out in time will mean the call has more time premium which makes it less likely to be assigned early. When rolling out in time, you can also roll the strike price up.
Hi In order to implement this strategy one needs to put BOTH a maximum price on the purchase price for the 100 stocks AND put a minimum price for the sell of the call option. How can I give both of these price limits (minimum for the sell and maximum for the buy) in a way that either both are executed or both are not executed (I don't want to buy the stock if I cannot sell the call option for the the minimal price and I don't want to sell the call option if I cannot buy the stock cheap enough)?
Can you use a DITM covered call for dividend capture? Let’s say the stock is at 40, pays a dividend of .30 and you sell a DITM covered call with an extrinsic of .15, you can collect those .15 because the buyer of the call will exercise to collect the dividend. You only need to hold the stock on the ex dividend date and you can get assigned very quickly. I know these numbers are made up, but I think the principle would work. Have you ever tried this?
Haven't tried it, but in theory it could work. I don't think there would be much edge though, because all the big funds would already be doing this if there were good returns to be made.
I do these deep in the money calls all the time and here are a few things to review for better returns. 1) Both stocks with and without dividend can be used. 2) If dividend stocks are used, buy near and before the first X-dividend date and sell after the last dividend date for the time period chosen. 3) Since the stock may be called at any time the annual returns should be checked at 3 different locations. At first dividend date and this return should be at least the annual dividend yield. At the last dividend date and this should be an annual yield you want. At the date the option expires and this again this should be an annual yield you want. This yield may be higher or lower than the last dividend date. 4) For any option make sure to compare several strike prices. Also compare the percent down from the purchase price to the strike price. By comparing these two this will give you a risk reward for the different strikes.
I like your video. I've been selling covered calls for several years and always done the "traditional" OTM trades, but just recently done several DITM for income stream and safety net if market takes a dump.
Thank you for your video. I recently entered an extreme DITM covered call where I bought NVDA shares for $127.00 and sold January 2025 calls with a $0.50 strike price where I received $126.57 in premiums. I also bought some January puts with an $8.00 strike price for a penny to protect the downside entirely and then some. This offered me close to a 14% return risk free. The only thing I don’t understand is why the trade is taking up so much margin when my exposure is zero. Any idea why there is such a high margin requirement for a zero risk position? Thanks
I do deep in the money calls on dividend stocks for varies time frames up to a year. In all cases, I want the stock to be called away otherwise you will not make the returns calculated. You need to check the annual return at 3 locations before the first and last dividend and at option expiration. If you are happy with the returns then make the trade. You do the annual return so you can compare different time frames and different stocks
For the more conservative stocks I would like at least 15 to 20% return and the same downside protection. I just did a stock that gave me that return for 5 months. It had a .8 Delta, 1.18 Beta & 6.6 PE. I should have mentioned that you check different strike prices to review risk vs rewards.
The numbers for NVDA if bought on 08/23/24 for a 09/20/24 call (28 days) with a purchase price of $129.37 and an average option price. Strike price of $100 will result in a 14.4% return and downside protection of 22.7%. Strike price of $105 will result in a 17.9% return and downside protection of 18.8%. Strike price of $110 will result in a 26.2% return and downside protection of 15.0%. Strike price of $115 will result in a 34.6% return and downside protection of 11.1%. No dividends considered as it is .01$ this Qt. Earning report is out on 08/28/24.
If I'm selling a DITM CC that has -.94 delta and the IV is 300%, the div isn't till aug and the contract expires in 18 days, are these good indicators? The break even is actually above the current stock price too. The only thing I have concerns is the bid-ask spread is not great, but the mark price is still good premium, but. I'd have to play with that in hope of getting it filled.
Another way to use DITM call options is a replacement for high dividend income stocks. You get downside protection unlike high dividend stocks. I have reviewed a number of high dividend stocks and very, very few outperform an SP500 index stock for total return over time.
I think you want an example of downside protection and not a comparison of a high dividend stocks to a SP500 index stock. So, let’s look at the APPL data I set earlier for the $150.00 strike price. First, I want to say the downside protection is incorrect as I copied the wrong column from my spreadsheet. With that said, subtract the strike price of $150.00 from the stock purchase price of $191.92 and that equals $41.92. To get the downside protection percent divide this difference $41.92 by the purchase price of $191.92 and that is .218. To get percent multiply .218 times 100 and that equals 21.8%. The breakeven point is when the purchase price less the option premium and less the dividends is reached. Hope this is what you wanted.
if i am down $1,100 on a stock thats at $112 and I sell a call at $75 I can get $4k+ in premium. I want the stocl called away. Any reason not to do this?
No major issues that I can think of. Highly likely to have the stock called away and you get a little bit of time premium. If anything, I would choose a slightly higher strike.
@@optionstradingiq question so if I sell my cold deep in the money at $75 is that what it gets cold away at? Or where the stock is when it's called way say 112
@@joeblstrn You stock will get called away at $75. But when you add in the $40 premium for selling the call, you total realized value will be 75 + 40 = $115
I calculated the deep in the money calls for AAPL from today 05/28/24 to the 12/20/24 for 2 periods of dividends. I would have waited until it was closer to first x-dividend date for better returns but this is just a real example. The annual returns shown are what you would receive if someone exercised the option on these dates. These were calculated using the average bid and ask price. You want the stock to be taken otherwise you won’t make as much or loss money. Dividend Date Strike 1st Last 12/20/24 Down Side Protection $130 14.3% 6.8% 5.9% 14.3% $140 17.7% 8.3% 7.1% 17.7% S150 19.5% 9.1% 7.7% 19.5% $160 22.0% 10.2% 8.5% 22.0% $170 26.0% 12.0% 10.0% 23.1%
If the underlying stock price rises significantly, how does rolling the CC further out help? 4:15 It would seem that extending the contract expiration would only increase the probability of assignment by allowing _even more_ time for the stock price to rise.
In the long-term maybe. In the short-term, rolling out in time will mean the call has more time premium which makes it less likely to be assigned early. When rolling out in time, you can also roll the strike price up.
Hi
In order to implement this strategy one needs to put BOTH a maximum price on the purchase price for the 100 stocks AND put a minimum price for the sell of the call option.
How can I give both of these price limits (minimum for the sell and maximum for the buy) in a way that either both are executed or both are not executed (I don't want to buy the stock if I cannot sell the call option for the the minimal price and I don't want to sell the call option if I cannot buy the stock cheap enough)?
Most brokers will allow you do to it as a single Covered Call trade. I'll try and do a video to show you how to to it in IBKR.
@optionstradingiq
That would be great!
Please do.
Really looking forward to it!
🙏
Interesting concept Gavin. Do you hold these to expiration and let the shares get called away?
Generally, yes. But if there is still a while to go and very little extra profit remaining, I might close it out early, or roll up the call.
Can you use a DITM covered call for dividend capture? Let’s say the stock is at 40, pays a dividend of .30 and you sell a DITM covered call with an extrinsic of .15, you can collect those .15 because the buyer of the call will exercise to collect the dividend. You only need to hold the stock on the ex dividend date and you can get assigned very quickly.
I know these numbers are made up, but I think the principle would work. Have you ever tried this?
Haven't tried it, but in theory it could work. I don't think there would be much edge though, because all the big funds would already be doing this if there were good returns to be made.
Can the wash rule apply when selling itm covered calls?
Yes, it can apply in certain situations, but you should always seek independent tax advice as I am not a tax expert.
I do these deep in the money calls all the time and here are a few things to review for better returns.
1) Both stocks with and without dividend can be used.
2) If dividend stocks are used, buy near and before the first X-dividend date and sell after the last dividend date for the time period chosen.
3) Since the stock may be called at any time the annual returns should be checked at 3 different locations. At first dividend date and this return should be at least the annual dividend yield. At the last dividend date and this should be an annual yield you want. At the date the option expires and this again this should be an annual yield you want. This yield may be higher or lower than the last dividend date.
4) For any option make sure to compare several strike prices. Also compare the percent down from the purchase price to the strike price. By comparing these two this will give you a risk reward for the different strikes.
Very good advice.
I like your video. I've been selling covered calls for several years and always done the "traditional" OTM trades, but just recently done several DITM for income stream and safety net if market takes a dump.
Yes, they do provide a good safety net, I like that term.
Thank you for your video. I recently entered an extreme DITM covered call where I bought NVDA shares for $127.00 and sold January 2025 calls with a $0.50 strike price where I received $126.57 in premiums. I also bought some January puts with an $8.00 strike price for a penny to protect the downside entirely and then some. This offered me close to a 14% return risk free. The only thing I don’t understand is why the trade is taking up so much margin when my exposure is zero. Any idea why there is such a high margin requirement for a zero risk position? Thanks
Not sure to be honest, you might have to ask your broker. Seems odd though if it's a risk free trade.
I do deep in the money calls on dividend stocks for varies time frames up to a year. In all cases, I want the stock to be called away otherwise you will not make the returns calculated. You need to check the annual return at 3 locations before the first and last dividend and at option expiration. If you are happy with the returns then make the trade. You do the annual return so you can compare different time frames and different stocks
Also, compare different strike prices to evaluate risk vs reward
What is the typical annual return you are looking for?
For the more conservative stocks I would like at least 15 to 20% return and the same downside protection. I just did a stock that gave me that return for 5 months. It had a .8 Delta, 1.18 Beta & 6.6 PE.
I should have mentioned that you check different strike prices to review risk vs rewards.
The numbers for NVDA if bought on 08/23/24 for a 09/20/24 call (28 days) with a purchase price of $129.37 and an average option price. Strike price of $100 will result in a 14.4% return and downside protection of 22.7%. Strike price of $105 will result in a 17.9% return and downside protection of 18.8%. Strike price of $110 will result in a 26.2% return and downside protection of 15.0%. Strike price of $115 will result in a 34.6% return and downside protection of 11.1%. No dividends considered as it is .01$ this Qt. Earning report is out on 08/28/24.
@@Retired-CB Yes, I do the same. 15-20% is a good goal.
If I'm selling a DITM CC that has -.94 delta and the IV is 300%, the div isn't till aug and the contract expires in 18 days, are these good indicators? The break even is actually above the current stock price too. The only thing I have concerns is the bid-ask spread is not great, but the mark price is still good premium, but. I'd have to play with that in hope of getting it filled.
Sounds like an interesting scenario. I would be a little bit careful of anything with IV that high, it's probably that high for a reason.
Another way to use DITM call options is a replacement for high dividend income stocks. You get downside protection unlike high dividend stocks. I have reviewed a number of high dividend stocks and very, very few outperform an SP500 index stock for total return over time.
Can you show an example?
I think you want an example of downside protection and not a comparison of a high dividend stocks to a SP500 index stock. So, let’s look at the APPL data I set earlier for the $150.00 strike price. First, I want to say the downside protection is incorrect as I copied the wrong column from my spreadsheet. With that said, subtract the strike price of $150.00 from the stock purchase price of $191.92 and that equals $41.92. To get the downside protection percent divide this difference $41.92 by the purchase price of $191.92 and that is .218. To get percent multiply .218 times 100 and that equals 21.8%. The breakeven point is when the purchase price less the option premium and less the dividends is reached. Hope this is what you wanted.
@@Retired-CB Thanks
Hi one of your follower from India.
New perspective however looks highly risky & timely adjustments would play a crucial role.
I would not say highly risky at all. It is less risky that stock ownership and should experience lower volatility of returns.
if i am down $1,100 on a stock thats at $112 and I sell a call at $75 I can get $4k+ in premium. I want the stocl called away. Any reason not to do this?
No major issues that I can think of. Highly likely to have the stock called away and you get a little bit of time premium. If anything, I would choose a slightly higher strike.
@@optionstradingiq question so if I sell my cold deep in the money at $75 is that what it gets cold away at? Or where the stock is when it's called way say 112
@@joeblstrn You stock will get called away at $75. But when you add in the $40 premium for selling the call, you total realized value will be 75 + 40 = $115
I calculated the deep in the money calls for AAPL from today 05/28/24 to the 12/20/24 for 2 periods of dividends. I would have waited until it was closer to first x-dividend date for better returns but this is just a real example. The annual returns shown are what you would receive if someone exercised the option on these dates. These were calculated using the average bid and ask price. You want the stock to be taken otherwise you won’t make as much or loss money.
Dividend Date
Strike 1st Last 12/20/24 Down Side Protection
$130 14.3% 6.8% 5.9% 14.3%
$140 17.7% 8.3% 7.1% 17.7%
S150 19.5% 9.1% 7.7% 19.5%
$160 22.0% 10.2% 8.5% 22.0%
$170 26.0% 12.0% 10.0% 23.1%
Hi Gavin! I can’t private mentoring related info in your website. Do you by any chance do that ?
I'm not offering private mentoring at the moment, only group coaching.
@@optionstradingiq okay thanks for the response 🙏
Interesting approach. I may try $ORCL to see how this works out.
Let me know how it goes. Feel free to email me info(at)optionstradingiq.com