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What to do with a covered call that is deep in the money?

When should you sell deep in the money covered calls?First, buyers who like to use covered calls can sell deep in-the-money options if they are looking to get out of the stock. By selling a deep in-the-money call, it is highly likely the stock will get called away. Traders employing this strategy are not overly bullish on their stock position.

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Is selling in the money covered calls a good strategy? Some advisers and more than a few investors believe selling “Covered Calls” is a way of generating “free money.” Unfortunately, this isn't true. While this strategy could work for investors whose focus is immediate cash to pay bills, it likely won't work for investors whose focus is on long-term total return.

What happens when your covered call is in the money?

A covered call is a neutral to bullish strategy where you sell one out-of-the-money (OTM) or at-the-money (ATM) call options contract for every 100 shares of stock you own, collect the premium, and then wait to see if the call is exercised or expires.

What happens if you sell an ITM covered call?

An In-the-Money (ITM) option has a strike price less than the current market price. By selling an ITM option, you will collect more premium but also increase your chances of being called away. When trading options, you also need to pick an expiration.

What to do if covered call is in the money?

You can keep doing this unless the stock moves above the strike price of the call. When that happens, you can either let the in-the-money (ITM) call be assigned and deliver the long shares, or buy the short call back before expiration, take a loss on that call, and keep the stock.

When should I take profits on covered calls?

If you've had a nice gain in a stock position it's good discipline to take a bit off the table from time to time to rebalance your portfolio. Covered calls are a good way to exit a position, or part of a position, by milking it for a bit of extra profit.

What to do with a covered call that is deep in the money?

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).

Why would you sell ITM covered calls?

Income-oriented investors generally like writing short-term in the money covered calls. It's a popular strategy because there is some downside protection and they can calculate in advance what their return will be if the call option is exercised and the stock is taken away.

Why would someone sell an in the money call option?

Being in the money gives a call option intrinsic value. Generally, the more out of the money an option is, the lower its market price will be. Once a call option goes into the money, it is possible to exercise the option to buy a security for less than the current market price.

Can you lose money with covered calls?

The maximum loss on a covered call strategy is limited to the price paid for the asset, minus the option premium received. The maximum profit on a covered call strategy is limited to the strike price of the short call option, less the purchase price of the underlying stock, plus the premium received.

Related Questions

Why would you sell an ITM call option?

The benefits of using ITM options for trading include the possibility of selling the stock at a profit when the current market price is higher than the strike price; in the case of the ITM call option.

Should I sell deep in the money covered calls?

Selling deep in the money calls is a great way for investors to generate recurring monthly income. Because of their relative safety (i.e. large amount of intrinsic value), deep in the money calls are one of the most popular kinds of covered calls to sell.

How do you profit from a covered call?

The maximum profit potential of a covered call is achieved if the stock price is at or above the strike price of the call at expiration. The maximum profit potential is the sum of the call premium and the difference between the strike price and the stock price.

Should you let covered calls expire?

If you select ATM covered calls and the stock declines in value, they too should expire worthless and the outcome is essentially the same. If the stock appreciates in value above the strike price, you'll probably have your stock called away (assigned) at the strike price, either prior to or at expiration.

Why would someone sell a covered call in the money?

It involves writing (selling) in-the-money covered calls, and it offers traders two major advantages: much greater downside protection and a much larger potential profit range.

Can you sell deep in the money covered calls?

First, buyers who like to use covered calls can sell deep in-the-money options if they are looking to get out of the stock. By selling a deep in-the-money call, it is highly likely the stock will get called away. Traders employing this strategy are not overly bullish on their stock position.

Why would someone sell deep in the money calls?

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.

Why would you sell ITM puts?

➢ Selling an ITM put is a strategy which may be used in an attempt to acquire the stock at a discount. Be careful though – if the price goes up, you could miss out on the opportunity.

What happens when you sell an out-of-the-money call option?

If the stock trades below the strike price, the call is “out of the money” and the option expires worthless. Then the call seller keeps the premium paid for the call while the buyer loses the entire investment.

Can you lose a lot of money selling covered calls?

The maximum loss on a covered call strategy is limited to the price paid for the asset, minus the option premium received. The maximum profit on a covered call strategy is limited to the strike price of the short call option, less the purchase price of the underlying stock, plus the premium received.

Why am I losing money on my covered call?

There are two risks to the covered call strategy. The real risk of losing money if the stock price declines below the breakeven point. The breakeven point is the purchase price of the stock minus the option premium received. As with any strategy that involves stock ownership, there is substantial risk.

When should I sell ITM option?

When there is a right to sell the underlying security at a price higher than its strike price, the right to sell has a value equal to at least the amount of the sale price less the current market price. Therefore, an ITM put option is one where the strike price is above the current market price.

Is it better to sell ITM or OTM options?

Because ITM options have intrinsic value and are priced higher than OTM options in the same chain, and can be immediately exercised. OTM are nearly always less costly than ITM options, which makes them more desirable to traders with smaller amounts of capital.

What happens when covered calls expire?

To create a covered call, you short an OTM call against stock you own. If it expires OTM, you keep the stock and maybe sell another call in a further-out expiration. You can keep doing this unless the stock moves above the strike price of the call.

How far out should I sell a covered call?

Consider 30-45 days in the future as a starting point, but use your judgment. You want to look for a date that provides an acceptable premium for selling the call option at your chosen strike price. As a general rule of thumb, some investors think about 2% of the stock value is an acceptable premium to look for.

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