I use deep in the money covered calls as a replacement for income compared to high dividend stocks since I am retired. When I do this, I want the stock option to be exercised if not you will either lose money or make less than anticipated. Here is a trade I recently made. I bought a stock on 06/20/24 for $39.04 with an option premium of $7.71 and a strike price of $32.50 that expired on 11/18/24 (151 days). The dividend is $1.56 (4.0%) annually and will have 2 dividends in this time frame. The profit is -$39.04 + 7$.71 +$32.50 + ($1.56/4*2) = $1.95. The return for 151 days is $1.95/ ($39.04-$7.71) = 6.22%. The annual return is 6.22%*365/151 = 15.04%. The downside protection is ($39.04 - $32.50)/$39.04 = 16.75%. The option delta was .8, the P/E was 6.56 and the Delta was 1.18.
ITM covered calls protect you against losses in the share price. The buyer takes most of the risk of the stock price declining and you keep the extra premium.
It becomes a different strategy when you add in dividends on higher paying stocks. Doing puts on higher dividend stocks starts to not to make as much sense on.
I use ITM or ATM covered calls on higher dividend paying stocks. For example I wrote a Jan 2025 55 call on O for around $3.00, bought is at 55 and should collect .263 dividends per month for 6 months. So net profit if called $458 for an 8.8% return in 187 days.
I sell OTM CC to enhance my income with less chance of getting my shares called away. If share price has a sudden spike then I sell CC two strike price ITM. As I am no a trader I don’t indulge myself into this as an addiction but an occasional fun, instead.
Awesome clip and thanks for answering my question Davis, much appreciated. Its basically what I believed so nice illustration. Sell ITM when overbought for a hedge. I should have done that months ago on a position or sold the stock outright. Also, and here is a constraint I put on, if you want the stock for another 12 months plus, and I like selling weeklies, and if you really undertstand the current regime ( bearish vs bullish) I like selling premium to earn the premium and then roll every week to avoid assignment at a loss if the position goes ITM. This way, I collect a lot of premium and I keep the stock and I stop selling the weeklies when I expect the market to turn back up.....Good stuff n thanks.
I have a stock I'm down $1k+.. if I go way deep in the money I can make $4k ... What's the down side? Deep in the money @60 when stock is $112 my price $125
Hi Davis. I just rewatched. One point I would add. If you have a PM acct, the margin on the ccall is less than that required for the equivelant amt of cash secured put sales BUT I am using an ATM put like with the ccall for the most extrinsic value. Thanks.
I am beginner learning so Davis, what I try to understand if you sell cc itm or otm still may generate some premium profit more or less depends where you entry point, it's right
ITM CC will always have more premium because it will have both extrinsic and intrinsic value, but have a higher chance of being ITM at expiration. OTM CC on the other hand only have extrinsic value, but have a lower chance of being ITM at expiration. Hope this helps!
For the position I am trading, the put premium is paper thin so I have not used that idea. However, with other future positions, it looks like a great one to add to my tool kit. Thanks Davis.
@@optionswithdavis Thanks Davis, good man. Yes, I enjoy our discussions by the way. Call skew, yes, then the move is biased to the upside. Got to love options and stock n combos etc. I see the options market as an essentially infinite mxn matrix with so many things a person can do. Its like in linear algebra, one of the 3 answers to solving a guassian matrix is the solution of 'infinitely many solutions..." Thanks n have a great night.
What if you're selling a in the money cover call, and the price of the stock drops, but not down below the strike price....... what the buyer of that call option still exercise his call option even though he would be technically at a loss on that position iffy factor in the intrinsic value that he paid for the option
Good video. I liked the OTM put idea and may need to think thru it more. But one thing I would add to it - for long term holders, dividends can come into play on increased profits. Because of that, going long 100 shares + selling a CCall will allow you to still capture dividends, where OTM puts you wouldn't get that. Just a thought. I enjoyed the rest of the vid.
Is there any sort of viability to the idea of buying a stock and selling a deep ITM LEAP call, to hold the stock for dividends for a while? For instance if I look at something like SCHD today, it's at 72 and the lowest LEAP call is a 35 strike with a 35 bid and 39.50 ask. Last trade 38.50. There's no premium with this, delta is like .9999. But you'd be into 100 shares at a cost of about 50% of the current market price, and thus have a dividend yield more around 7.2% instead of 3.6%? Or would early exercise of a deep ITM LEAP be too likely?
If the extrinsic value is lower than the dividend, then you will most likely be exercised. Also, there is less liquidity the further away you are from the underlying price. In other words, the spread will be wider and it will be hard for you to get in and out the position. Finally, selling a LEAP as a CC means that the daily theta you collect for it will be very low. All the above are reasons for not doing that...
Does it always go of the current stock price or the cost basis that I have on the stock , For example my cost basis is 49 but the stock price is currently 55 just wondering if should place a covered call above 49 or 55
Interesting analysis, but the scripts which I wrote and run on ThinkorSwim also show that in many instances the ITM is generally more profitable than selling ITM covered calls. But good analysis.
if i understand correctly, you still collect the premium, just limits your upside on the long 100 shares. if stock drops below the strike then the premium will reduce the loss on the long 100.
Same risk as selling a naked put at the same strike. Buy writes you cap your upside in good times. You need all the upside gains in good times to offset losses in bad times. Just collecting premium is not going offset big drops
If people are looking for income I don't think price drops matter much.... I think they want income and probably don't care too much because they are not looking for more money just some coming in constantly.
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I use deep in the money covered calls as a replacement for income compared to high dividend stocks since I am retired. When I do this, I want the stock option to be exercised if not you will either lose money or make less than anticipated. Here is a trade I recently made. I bought a stock on 06/20/24 for $39.04 with an option premium of $7.71 and a strike price of $32.50 that expired on 11/18/24 (151 days). The dividend is $1.56 (4.0%) annually and will have 2 dividends in this time frame. The profit is -$39.04 + 7$.71 +$32.50 + ($1.56/4*2) = $1.95. The return for 151 days is $1.95/ ($39.04-$7.71) = 6.22%. The annual return is 6.22%*365/151 = 15.04%. The downside protection is ($39.04 - $32.50)/$39.04 = 16.75%. The option delta was .8, the P/E was 6.56 and the Delta was 1.18.
ITM covered calls protect you against losses in the share price. The buyer takes most of the risk of the stock price declining and you keep the extra premium.
There's really no premium if not a tiny lost.
Superb explanation. Best explanation so far after I watched 18 Videos about CC's.
No blah blah, just essence.
Thanks very much.
Thanks ☺️ And you're welcome 👍
It becomes a different strategy when you add in dividends on higher paying stocks. Doing puts on higher dividend stocks starts to not to make as much sense on.
Fantastic point starting at 16:10
☺️
this was an absolutely great video! I learn a lot watching your channel.
I use ITM or ATM covered calls on higher dividend paying stocks. For example I wrote a Jan 2025 55 call on O for around $3.00, bought is at 55 and should collect .263 dividends per month for 6 months. So net profit if called $458 for an 8.8% return in 187 days.
I sell OTM CC to enhance my income with less chance of getting my shares called away. If share price has a sudden spike then I sell CC two strike price ITM.
As I am no a trader I don’t indulge myself into this as an addiction but an occasional fun, instead.
Great video again Davis, I am currently learning option, Thank you again for the video
You're welcome 👍
Awesome clip and thanks for answering my question Davis, much appreciated. Its basically what I believed so nice illustration. Sell ITM when overbought for a hedge. I should have done that months ago on a position or sold the stock outright. Also, and here is a constraint I put on, if you want the stock for another 12 months plus, and I like selling weeklies, and if you really undertstand the current regime ( bearish vs bullish) I like selling premium to earn the premium and then roll every week to avoid assignment at a loss if the position goes ITM. This way, I collect a lot of premium and I keep the stock and I stop selling the weeklies when I expect the market to turn back up.....Good stuff n thanks.
You're very welcome ☺️ And thanks for sharing 👍
This good option for registered accounts where you are not allowed to sell cash secured puts
Very good explanation and appreciate your insight.
You're welcome ☺️
I have a stock I'm down $1k+.. if I go way deep in the money I can make $4k ... What's the down side? Deep in the money @60 when stock is $112 my price $125
Excellent explanation and analysis.
Thank you 😊
Hi Davis. I just rewatched. One point I would add. If you have a PM acct, the margin on the ccall is less than that required for the equivelant amt of cash secured put sales BUT I am using an ATM put like with the ccall for the most extrinsic value. Thanks.
Good point, thanks for sharing 👍
@@optionswithdavis Thanks and have a great week Davis.
👍
I am beginner learning so Davis, what I try to understand if you sell cc itm or otm still may generate some premium profit more or less depends where you entry point, it's right
ITM CC will always have more premium because it will have both extrinsic and intrinsic value, but have a higher chance of being ITM at expiration. OTM CC on the other hand only have extrinsic value, but have a lower chance of being ITM at expiration. Hope this helps!
For the position I am trading, the put premium is paper thin so I have not used that idea. However, with other future positions, it looks like a great one to add to my tool kit. Thanks Davis.
That's right, if there's call skew, it might be better to put on a CC position. And you're welcome 👍
@@optionswithdavis Thanks Davis, good man. Yes, I enjoy our discussions by the way. Call skew, yes, then the move is biased to the upside. Got to love options and stock n combos etc. I see the options market as an essentially infinite mxn matrix with so many things a person can do. Its like in linear algebra, one of the 3 answers to solving a guassian matrix is the solution of 'infinitely many solutions..." Thanks n have a great night.
Great analogy 👍
What if you're selling a in the money cover call, and the price of the stock drops, but not down below the strike price....... what the buyer of that call option still exercise his call option even though he would be technically at a loss on that position iffy factor in the intrinsic value that he paid for the option
Good video. I liked the OTM put idea and may need to think thru it more. But one thing I would add to it - for long term holders, dividends can come into play on increased profits. Because of that, going long 100 shares + selling a CCall will allow you to still capture dividends, where OTM puts you wouldn't get that. Just a thought. I enjoyed the rest of the vid.
I totlly agree
Is there any sort of viability to the idea of buying a stock and selling a deep ITM LEAP call, to hold the stock for dividends for a while? For instance if I look at something like SCHD today, it's at 72 and the lowest LEAP call is a 35 strike with a 35 bid and 39.50 ask. Last trade 38.50. There's no premium with this, delta is like .9999. But you'd be into 100 shares at a cost of about 50% of the current market price, and thus have a dividend yield more around 7.2% instead of 3.6%? Or would early exercise of a deep ITM LEAP be too likely?
If the extrinsic value is lower than the dividend, then you will most likely be exercised. Also, there is less liquidity the further away you are from the underlying price. In other words, the spread will be wider and it will be hard for you to get in and out the position. Finally, selling a LEAP as a CC means that the daily theta you collect for it will be very low. All the above are reasons for not doing that...
very good explanation mate.
Thanks ☺️
Does it always go of the current stock price or the cost basis that I have on the stock , For example my cost basis is 49 but the stock price is currently 55 just wondering if should place a covered call above 49 or 55
Interesting analysis, but the scripts which I wrote and run on ThinkorSwim also show that in many instances the ITM is generally more profitable than selling ITM covered calls. But good analysis.
Thanks! And thanks for sharing!
Clearly I didn't have my coffee. Sorry. I meant to say selling the ITM is generally more profitable than selling the OTM. Thank you.
No worries, you're welcome 👍
@@pkuchnicki plus you have more protection if the share price declines. With OTM calls your profit is limited to the premium
What is net return if u buy to close an ITM CC?
In what scenarios can ITM sell calls go wrong? In all the 3 scenarios you've described, there was some profit. When can I get into losses?
if i understand correctly, you still collect the premium, just limits your upside on the long 100 shares. if stock drops below the strike then the premium will reduce the loss on the long 100.
Great video.
Thank you ☺️
Awesome content!! 💯
🇮🇳♥️
Thanks 👍
Very good 🇮🇳
Thanks for your support 😊
Great
☺️
thanks. take it home
You're welcome.
Same risk as selling a naked put at the same strike. Buy writes you cap your upside in good times. You need all the upside gains in good times to offset losses in bad times. Just collecting premium is not going offset big drops
Exactly. I do not see any advantage in this strategy vs selling naked puts.
If people are looking for income I don't think price drops matter much.... I think they want income and probably don't care too much because they are not looking for more money just some coming in constantly.