Rising Market Covered Calls. Do you have an idea for a topic you'd like us to write about? We've discussed in the money covered calls before, but given the market's recent run up, we thought it timely to revisit the subject for those of you who feel we're a bit overbought and are looking for some safety.
If you do any buy-writes next week with Feb expirations you may want to consider deep in the money options. Deep In the money calls are those where the strike price of the call option is significantly less than the current stock price. What is "significantly less"? The IRS definition of deep in the money is any option with less than 90 days until expiration where the strike is less than the first available in the money strike, or any option with more than 90 days until expiration where the strike is less than 2 strikes in the money.
The advantage of selling deep in the money calls is the safety you get with increased downside protection intrinsic value. The disadvantage is that there may not be much time premium and you give up all of your upside potential. And note that buying deep in the money calls is a completely different strategy, and not covered here.
You want to sell the stock. By selling a deep in the money call against it you can get a little extra time premium for stock you were going to sell anyway. You've had a big run up in the stock and want to protect recent gains.
If you think the stock is due for a little pull back but you don't want to sell the stock then sell a deep in the money call against it. Once the pull back takes place you can buy the option back and you've protected yourself from the pull back. If the stock doesn't pull back and you want to keep it then you will have to buy the option back potentially at a loss prior to expiration.
You want to do a buy-write so you can earn a higher yield than what you can get in cash. Probably the most common reason for selling deep in the money calls.
Unless the stock finishes below the strike price at expiration you'll be able to calculate in advance what your yield will be as you wait for it to be called away. Be careful not to do this if earnings will be released before option expriation too much volatility.
Stock is trading at You could buy shares of stock at Note that even if MMR fell from its current However, if MMR was below your net debit The call options give you some, but not total, downside protection.
If MMR at 15 makes you nervous then you can do the same thing with the Mar 14 options instead. Born To Sell has a special screener that finds high yield deep in the money candidates. It's called Max Protection.
You can then use other standard filters to do things like remove all candidates that have earnings before expiration, for example. Login Free Trial Free Newsletter. Covered Call Blog How to use covered calls to generate recurring income. Receive new blog articles automatically by following us:More...