Comments on: Deep In The Money Covered Calls on PG http://mytradersjournal.com/stock-options/2010/04/27/deep-in-the-money-covered-calls-on-pg/ Investing in Stocks Through Options Fri, 27 Jan 2012 21:33:26 +0000 hourly 1 http://wordpress.org/?v=3.3.1 By: Alex Fotopoulos http://mytradersjournal.com/stock-options/2010/04/27/deep-in-the-money-covered-calls-on-pg/#comment-6780 Alex Fotopoulos Wed, 28 Apr 2010 20:58:48 +0000 http://mytradersjournal.com/stock-options/?p=4769#comment-6780 Good explaination Ken. I understood the parity going in, but misjudged how deep the calls could be before they'd all get cleaned out. Attempting the 55 strike was just silly (to use a nice word), but at the 60 strike I had slightly better than a 50/50 chance of it working based on what the open interest was before the markets opened. The 62.50 strike looks like it would've worked. So, what I have to decide is how much risk I want to take if I'm going to attempt this any more. The 33 strike on SO might have been $1 too low to not get assigned. I'll know in the morning. Good explaination Ken. I understood the parity going in, but misjudged how deep the calls could be before they’d all get cleaned out. Attempting the 55 strike was just silly (to use a nice word), but at the 60 strike I had slightly better than a 50/50 chance of it working based on what the open interest was before the markets opened. The 62.50 strike looks like it would’ve worked. So, what I have to decide is how much risk I want to take if I’m going to attempt this any more. The 33 strike on SO might have been $1 too low to not get assigned. I’ll know in the morning.

]]> By: Ken Ginsberg http://mytradersjournal.com/stock-options/2010/04/27/deep-in-the-money-covered-calls-on-pg/#comment-6778 Ken Ginsberg Wed, 28 Apr 2010 20:10:36 +0000 http://mytradersjournal.com/stock-options/?p=4769#comment-6778 Alex: Keep in mind something called put/call parity. The price of the put/call options at the same strike typically takes into account any divvy that may be paid during the cycle [as well as risk-free interest rates which today are basically 0%]. If this were not the case than an arbitrage could be set up to take advantage of any disparity and then the disparity would quickly disappear as prices get pushed into parity again. Right now @ 355PM, SO (the other stock you were doing this strategy with)is at 35.29 and the May 33 puts are .05X.15. If you sold it at midpoint (.10), your naked yield would be about .3% (assuming you fully cash secure the naked put, significantly higher yield if done on margin) for an annualized [approx] 4.5% which does not equal SO's divvy yield, but a whole lot better than cash with considerable downside protection. No free lunches unfortunately. I wish there were I would be headed for the front of that line. Alex:

Keep in mind something called put/call parity. The price of the put/call options at the same strike typically takes into account any divvy that may be paid during the cycle [as well as risk-free interest rates which today are basically 0%]. If this were not the case than an arbitrage could be set up to take advantage of any disparity and then the disparity would quickly disappear as prices get pushed into parity again.
Right now @ 355PM, SO (the other stock you were doing this strategy with)is at 35.29 and the May 33 puts are .05X.15. If you sold it at midpoint (.10), your naked yield would be about .3% (assuming you fully cash secure the naked put, significantly higher yield if done on margin) for an annualized [approx] 4.5% which does not equal SO’s divvy yield, but a whole lot better than cash with considerable downside protection.
No free lunches unfortunately. I wish there were I would be headed for the front of that line.

]]> By: Alex Fotopoulos http://mytradersjournal.com/stock-options/2010/04/27/deep-in-the-money-covered-calls-on-pg/#comment-6777 Alex Fotopoulos Wed, 28 Apr 2010 18:42:52 +0000 http://mytradersjournal.com/stock-options/?p=4769#comment-6777 @ Ken - I think going another month out might be the key, but there's not much extrinsic value in those calls either, except at-the-money which seems too risky. I'll probably give it a try though. Selling deep out of the money naked puts isn't as alluring to me since there's no dividend. I'd prefer to sell them closer to at-the-money or one strike lower like most of my trades. @ Ken – I think going another month out might be the key, but there’s not much extrinsic value in those calls either, except at-the-money which seems too risky. I’ll probably give it a try though.
Selling deep out of the money naked puts isn’t as alluring to me since there’s no dividend. I’d prefer to sell them closer to at-the-money or one strike lower like most of my trades.

]]> By: Ken Ginsberg http://mytradersjournal.com/stock-options/2010/04/27/deep-in-the-money-covered-calls-on-pg/#comment-6775 Ken Ginsberg Wed, 28 Apr 2010 16:08:03 +0000 http://mytradersjournal.com/stock-options/?p=4769#comment-6775 You paid $55.02 for a stock that was almost a certainty to be called away from you for the divvy (as it was). If the extrinsic value in a short call is less than the upcoming divvy, you should assume that it would be exercised the day before ex-div (you have to get pretty lucky to have it go unexercised. I use a similar methodology to what you are attempting but either go out another month for the short call portion so that the chances improve that the extrinsic value is greater than the divvy (so I get to be paid the divvy), or sell naked the DOTM put which already reflects the fact that the stock will be paying the divvy and providses the same downside protection as the CC. You paid $55.02 for a stock that was almost a certainty to be called away from you for the divvy (as it was). If the extrinsic value in a short call is less than the upcoming divvy, you should assume that it would be exercised the day before ex-div (you have to get pretty lucky to have it go unexercised.
I use a similar methodology to what you are attempting but either go out another month for the short call portion so that the chances improve that the extrinsic value is greater than the divvy (so I get to be paid the divvy), or sell naked the DOTM put which already reflects the fact that the stock will be paying the divvy and providses the same downside protection as the CC.

]]> By: Alex Fotopoulos http://mytradersjournal.com/stock-options/2010/04/27/deep-in-the-money-covered-calls-on-pg/#comment-6774 Alex Fotopoulos Wed, 28 Apr 2010 16:07:10 +0000 http://mytradersjournal.com/stock-options/?p=4769#comment-6774 Thanks John. Can you give us an example of one of your trades like this the next time you work one? I'm writing up my SO trade details from today (4/28) now and will have it posted before long. Thanks John. Can you give us an example of one of your trades like this the next time you work one? I’m writing up my SO trade details from today (4/28) now and will have it posted before long.

]]> By: John Ware http://mytradersjournal.com/stock-options/2010/04/27/deep-in-the-money-covered-calls-on-pg/#comment-6773 John Ware Wed, 28 Apr 2010 13:36:04 +0000 http://mytradersjournal.com/stock-options/?p=4769#comment-6773 I've tried it, and it works, but I don't tie up as much capital in the process. I will use a more volatile stock, one with a negative skew, so that the bias is to the downside. Secondly, if you use this strategy enough, you will find many arbitrage opportunities (selling more overpriced calls vs their put counterparts) so that your average return will be closer to 1.5% or more (rather than your <1% example). I’ve tried it, and it works, but I don’t tie up as much capital in the process. I will use a more volatile stock, one with a negative skew, so that the bias is to the downside. Secondly, if you use this strategy enough, you will find many arbitrage opportunities (selling more overpriced calls vs their put counterparts) so that your average return will be closer to 1.5% or more (rather than your <1% example).

]]> By: Alex Fotopoulos http://mytradersjournal.com/stock-options/2010/04/27/deep-in-the-money-covered-calls-on-pg/#comment-6772 Alex Fotopoulos Wed, 28 Apr 2010 11:33:39 +0000 http://mytradersjournal.com/stock-options/?p=4769#comment-6772 Well, that didn't work. This morning (4/28) I received notice of my option assignment on PG. My shares were called away before the open so I won't receive the dividends. I'm going to try again on Southern Company (SO) today, but not as deep in the money to see if that makes a difference. As an update to open interest from the fourth comment above, the 55 strike went down to 2 contracts left open from 392 at the close, the 57.50 strike went down to 10 at the open from 205 at the close, the 60 strike went down to 2,318 open from 4,014 at the close and the 62.50 strike stayed the same. Apparently to make this type of trade work I'd have to take more risk, closer to the money or have some luck to be one of the few contracts left if I'm farther out of the money. Well, that didn’t work. This morning (4/28) I received notice of my option assignment on PG. My shares were called away before the open so I won’t receive the dividends. I’m going to try again on Southern Company (SO) today, but not as deep in the money to see if that makes a difference.
As an update to open interest from the fourth comment above, the 55 strike went down to 2 contracts left open from 392 at the close, the 57.50 strike went down to 10 at the open from 205 at the close, the 60 strike went down to 2,318 open from 4,014 at the close and the 62.50 strike stayed the same.

Apparently to make this type of trade work I’d have to take more risk, closer to the money or have some luck to be one of the few contracts left if I’m farther out of the money.

]]> By: Alex Fotopoulos http://mytradersjournal.com/stock-options/2010/04/27/deep-in-the-money-covered-calls-on-pg/#comment-6768 Alex Fotopoulos Tue, 27 Apr 2010 22:14:04 +0000 http://mytradersjournal.com/stock-options/?p=4769#comment-6768 Yep, we're saying the same thing then. Yep, we’re saying the same thing then.

]]> By: R Pell http://mytradersjournal.com/stock-options/2010/04/27/deep-in-the-money-covered-calls-on-pg/#comment-6767 R Pell Tue, 27 Apr 2010 21:37:39 +0000 http://mytradersjournal.com/stock-options/?p=4769#comment-6767 I'd expect the extrinsic value of the option to increase (and intrinsic value to decrease) as a consequence of the underlying stock going ex-div and the option price staying the same. (Of course I'm only referring to the effects from the stock going ex-dividend alone - there will always be other factors at work affecting the stock and option prices at any given time.) I’d expect the extrinsic value of the option to increase (and intrinsic value to decrease) as a consequence of the underlying stock going ex-div and the option price staying the same. (Of course I’m only referring to the effects from the stock going ex-dividend alone – there will always be other factors at work affecting the stock and option prices at any given time.)

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