One of the first strategies people learn in options trading is buying and selling calls, but a close second is selling covered calls. Today I want to share a variant of that famous strategy called selling “in the money” covered calls.
To review, the traditional covered call strategy involves buying 100 shares groups of a stock and then sell a call option against them, and the option strike price is higher than the current share price. Your aim is that the shares will move higher and your option is exercised at expiration for a profit or the price stays flat and you keep both the stock and the credit and sell the calls again next month.
Example:
You buy 100 shares of Ford for $9.00, that’s costs you $900.00.
You sell calls on Ford with a strike price of $10.00, you collect a premium or credit of 1.00 per share or $100.00. If the stock moves to $10.01 your options get exercised get for $10.00. You make $1.00 per share or $100.00, which added to you $100.00 premium gives you $200.00 profit on your investment. Or the stock stays below $10.00 and you don’t get exercised, you keep your 100 shares and your $100 dollar premium and you can sell calls again next month.
Now that’s the scenario with traditional covered calls and statistically speaking, 33% of the time stock goes down, 33% of the time it stays flat and 33% of the time it goes up. The biggest profit is when the stock goes up and you get called out. But that only occurs 1/3 of the time. But their is a way to increase your chances of getting exercised and maximizing your profit and that’s with a deep-in-the-money (DITM) covered call strategy.
Example:
You buy 100 shares of Ford for $9.00, that’s costs you $900.00.
However you sell calls on Ford with a strike price of $8.00, you collect a premium or credit of $2.50 per share or $250.00. If the stock stays flat your options get exercised for $8.00. You lose $1.00 per share on the sale, but make or $250.00 from the option, so you net $150.00 profit in one month. If the stock goes up your options get exercised for $8.00. You lose $1.00 per share on the sale, but make or $250.00 from the option, and you net $150.00 profit in one month. Or the stock goes down, but stays above $8.00 to your options get exercised get for $8.00. You lose $1.00 per share on the sale, but make or $250.00 from the option, but net $150.00 profit in one month.
Now that’s the scenario with traditional covered calls and statistically speaking, 33% of the time stock goes down, 33% of the time it stays flat and 33% of the time it goes up. So we earn our maximum profit over 2/3 of the time with this strategy.
Key Points to ITM Covered Calls
- You can do this in most trading accounts, including IRA.
- Always make sure you use safe position sizing – i.e. never put too much in a single investment.
- At expiration, if the shares are trading one penny above your strike price, they’ll be exercised and removed taken from your account.
Happy Trading!
Stay thirsty for knowledge my friends.
✍️ written by Shortsegments
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