option-info and options-graphs sites:
Outlook: Mildly bearish to bullish. The position will gain if the
stock rises, stays put, or falls somewhat.
Sell an ITM call against owned stock.
when: Stock does not fall below the stock price at entry - the credit
when: stock falls beyond the breakeven price.
Loss : Unlimited.
Calculation: Stock price at entry - option credit.
compared to stock: Takes advantage of stock that does not move or
moves within a range.
compared to stock: Very limited potential gains.
after entry, increasing implied volatility is negative.
after entry, the passage of time is positive.
Requirement : None, but stock ownership must be maintained.
Using an ATM strike will bring in a larger credit, but raise the
breakeven point as well.
Equivalent: Short Put at the same strike price.
- The Covered
Call using an ITM strike normally does not make much sense. You are
spending a lot to buy stock, taking in a very small premium, and have
a greatly increased chance of being called out of the stock.
if you are already a stock owner, want to own the stock for the long
term, but feel the stock is going to drop in the near term, this could
be a way to protect against a limited loss without spending anything
to buy a put. The example stock could drop from $50 to $44.61 for instance,
and your overall equity would not change much.
are always tradeoffs, however. If the stock were to rise after you sold
the ITM call, it would get expensive to buy it back in order to avoid
being called out of your stock. In effect, you would give up any increase
from the stock price.
- A different
philosophy for this same strategy can be used when you do not already
own the stock, the Implied Volatility is very high, and you do not expect
a large drop in the stock price. See the Buy-Write,
ITM for details.
this is a strategy with the potential for only small gains and possibly
large losses, you must control the losses. If the example stock dropped
to $45 at any time, the trade should probably be exited for a relatively
small loss. Trying to hang on could result in much larger losses.
- If the
short calls lose most of their value at any time, the calls can be bought
back for a small gain, to avoid the risk of the stock rising.
- If your
outlook for the stock becomes more bullish, you can roll the ITM calls
to either ATM or OTM calls expiring in a later month.
- Or if
your outlook is much more bullish, you should buy back the short calls
at any price, since they will only get more and more expensive to buy
back if the stock continues to rise.