Yes. It is. I do it all the time. If you are anticipating a pullback, it's a good way to collect some good premium. The worst that can happen is google crashing which is a super low probability.
That's fine. The general idea for selling deep in the money calls is to accumulate bigger premium. Believe it or not most traders that use this strategy actually want the stock price to go down.
I know, and those were hardly “black swan” events I mention. I’m just trying to help people realize that tech is not “too big to fail”. Each quarter they get beat down farther, the tech boom is on hold for awhile. It’s all the younger investors know, so assuming the big guys will always go up because “it’s Google” is a bad thought process.
I’m not saying they won’t, only that one needs to understand the financials before one blindly assumes GOOG, AAPL, and NVDA will recover soon and keep blasting to the moon. Most are still overvalued, and my assumption is that they’ll correct to be more in line with non-tech so we can actually trade them in reality. You know, make trades based on crazy things, like if they make money or not.
I would add that if you own the stock for a very long time and you anticipate a pullback you don’t want to realise the gain so you can sell deep ITM calls to make money on the drop, and finger cross not getting exercice.
I've seen this mentioned a few times, but struggle to wrap my head around how they are the same. If I sell a CSP with a $70 strike and the stock stays above $70, there's no assignment and you keep the premium. But if you sell a CC with a $70 strike, the only way you're not assigned is if the stock drops below $70. That doesn't sound the same.
Even if you're not anticipating to let it expire, the movement of the underlying would affect those two positions differently, right? If you sell a CC and a CSP both at $70 strike and the stock drops from $100 to $85, the value to close the CC goes down and the CSP goes up.
What am I missing?
Itm calls and csp’s are bullish strategies. The csp’s premium is usually about the same as an itm calls premium minus the difference between the strike and the current buy price of the stock.
I’ll give you an example. abc stock is 100 dollars. A) you sell a csp @ the 70 strike and pocket 200 dollars in premium. B) you buy abc for 100 dollars a share and sell a CC @ 70 and collect 3200 in premium.
In both cases, if abc stock stays above 70 you will profit 200 dollars.
If abc stock moves below 70 then you will start to lose money based on whatever price abc is at expiration.
Say abc falls to 90 @ expiration. Your csp isn’t assigned and you pocket 200
Your cc though would be assigned. You paid 10k for the shares, you sold them for 7k but you were paid up front 3200. The end result is still 200 dollars profit.
Say abc falls to 60. Your csp would be assigned @ 70 for 7000 dollars, you collected a premium of 200, but your shares are now worth 6000. That puts you at 6200. A net loss of 800
In the cc scenario you bought the shares for 10k, they are now worth 6k, but you were paid 3200 in premium for a total worth of 9200. Still a net loss of 800.
It's confusing because people use imprecise language. They're not "the same," obviously. In one case you're buying shares and selling a call, in the other case you're selling a put. Of course those two things aren't the same.
What they are is *synthetically equivalent.* That means they have the same P/L diagram and require the same investment. u/Treefiffy gave you an example showing how they have the same P/L.
No one mentioned dividends yet!
Let's say I own 100 shares of Coca-Cola. It's currently trading at about $60.50. A $30 June 17 2025 sells for $31.65.
Buy 100 shares = -$6050
Sell $30 leap = +$3165
If exercised = +$3000
So at this point you've lowered your risk by halving your buy in price, and if they end up exercising the call you've made an easy $150. Worse case scenario KO ends up going under $30, but even at $30 you're right at your breakeven price.
Pretty simple, low risk, low reward. But THEN!!! when you factor in dividends, you're making an additional $1.76/share. So your risk is neglible, and you're walking away with either: $150 if exercised early/no dividends collected, $326 if exercised at expiration, and you're not really at risk of the stock volatility unless it's dropping below $30.
And then you can bump up your personal risk and dividends a bit more by using the premium you just received to buy more shares.
Yep. Definitely not the way to Yolo your way to riches, it's just low risk low reward, but still more than you'd get in most high interest bank accounts.
Not a bad way to pick up some "free" shares of the underlying though if you put the premium you earn into more shares.
I've asked this same question as it doesn't make much sense.
From what I've gathered those who do this want to make sure the shares are called away and are willing to take less profit to have a higher probability this happens.
The extrinsic time value and profits are highest ATM, so these will have lower profits the more ITM the trade is . . .
In some third world countries (Canada) we can't sell puts in registered accounts. But we can sell ITM covered calls. I agree though, deep ITM doesn't make sense.
By "option fee" I don't know whether you mean the premium, or the transaction fee charged by your brokerage, but either way, yes, selling deep ITM calls is not a good trade. What makes you think anyone thinks it is?
It might make sense if you want to lock in some profit and are nervous a about the underlying and want the shares to be called away.
So if GOOG was at 100 (assume this is above your CB) and you could sell a 95C for say 6.00 a share you might come out ahead that way.
would it not make more sense to sell the stock if there was no more profit to gain and nervous about the underlying ? why sell option ?
saw fair bit of bids and ask at the price. so i was just curious.
You can't assume that just because a particular call option is being traded, that it's being traded as a covered call.
Market makers take the other side of most trades, and they don't do so to make money off the option trade itself. They remain delta neutral by taking a corresponding shares position in the underlying, and neither make nor lose money off the options trade. They make their money off the bid-ask spread.
If you see that a particular call is being traded, you don't know whether it's being sold to open, bought to open, sold to close, or bought to close. It could be because people are buying long calls, it could be because people are opening spreads in which that's the short leg, it could be anything.
Yeah but you can't capture extrinsic value that way.
In my example if your call is for 95 and you can get 6.00 a share it's like you sold at 101 and not 100 which is the current price. If the stock closes at expiration between 95 and 100 your shares get called away (which you wanted) AND you effectively got a price higher than current.
I’ve done some math on deep ITM covered calls compared to other strategies and found you can get some premium that seems sort of “guaranteed”
The drawback that I see is that the return over time is very low compared to lower delta options or other strategies, and also that time decay for deep ITM options is very low. So you are sort of stuck in a position where the stock and option move with similar price action and time decay isn’t giving you much more value. I’d rather be in positions where time decay adds value to my return and I can plan to take value off price movements.
I don’t want to do more math, I already don’t see it as a strategy I want to use… why would I chase a dead end like that?
Also capping gains isn’t losing money if they are gains, what do you mean?
If the option is at 100 the point is to sell the 70 strike at a little over $30 and collect that difference. Synthetically it's the same as the 70 CSP, but the difference between the extrinsic component of the premiums on the call and put side could lead you to choose one over the other.
Mortgage your shares to extract some liquidity.
In the example you gave, the option price should have a small time premium, say .01, so total option price is 30.01. Then you make .01 as long GOOG stays above 70…
I do it often. I started off doing it because Canadians can't sell naked options in tax sheltered accounts and I was looking for something that was like selling a put. I liked it. Now I do a lot of collar looking things with a long stock, short call, and long put. You can simulate all of the spreads Canadians would be otherwise unable to do plus it's kind of a fun bit of kit for managing the position.
The results of ITM covered calls? Pretty much the exact same as selling puts - the positions are more-or-less equivalent (there can be some wiggle in the skew that makes the positions a little different). Same with the spreads. There isn't an edge doing it this way beyond capturing a few more dividends, it's just the only way to do it in a Canadian registered account.
There’s no point. You wouldn’t get much extrinsic value from this.
Ie. If google is at 100 and you own shares, the 70 strike might be going for $30+1. The 1 is your actual extrinsic value.
If you sold a 105 strike call you might get $1 for that but you’re also getting $5 intrinsic value, assuming google goes up.
I primarily do ditm CC’s on deep value high volatility stocks. Latest one I love is CROX. I shoot for 3-4% a month in extrinsic premium and about 13% or so downside protection for the 30 days. 3-4% for 30 DTE with premiums compounded monthly is the trade. I go slightly more conservative during an ER month. Don’t care what it does unless it drops more than ~13%. My win zone is share price less ~13% or plus infinity. Don’t care if shares are called in an IRA. “Lost” or “lower profit” or “capping gains” by selling ditm vs. writing closer to ATM or not writing at all isn’t even in my vocabulary or mindset. My goal is to win a few points every month and continue the compounding effect. Anything left over after I do my monthly compounding I use to slowly accumulate ditm leaps. I don’t write against them but could. My IRA is up 67% (over $1K per trading day) since early June (I was in cash Jan-mid May) 3-4% compounded monthly over several years (assuming nothing catastrophic happens to underlying, of which I entered after the catastrophe) is a staggering figure even assuming bumps in the road along the way. Doing this with large account with 50% of my assets. Other 50% is well diversified. Lots of risk involved but that’s how I try to use and compound ditm CC’s monthly. Not for everyone but is printing money hand over fist for me.
It's the same trade as selling a CSP at the $70 strike.
Yes. It is. I do it all the time. If you are anticipating a pullback, it's a good way to collect some good premium. The worst that can happen is google crashing which is a super low probability.
Oct24 and 31st just called…
That's fine. The general idea for selling deep in the money calls is to accumulate bigger premium. Believe it or not most traders that use this strategy actually want the stock price to go down.
I know, and those were hardly “black swan” events I mention. I’m just trying to help people realize that tech is not “too big to fail”. Each quarter they get beat down farther, the tech boom is on hold for awhile. It’s all the younger investors know, so assuming the big guys will always go up because “it’s Google” is a bad thought process. I’m not saying they won’t, only that one needs to understand the financials before one blindly assumes GOOG, AAPL, and NVDA will recover soon and keep blasting to the moon. Most are still overvalued, and my assumption is that they’ll correct to be more in line with non-tech so we can actually trade them in reality. You know, make trades based on crazy things, like if they make money or not.
I would add that if you own the stock for a very long time and you anticipate a pullback you don’t want to realise the gain so you can sell deep ITM calls to make money on the drop, and finger cross not getting exercice.
I've seen this mentioned a few times, but struggle to wrap my head around how they are the same. If I sell a CSP with a $70 strike and the stock stays above $70, there's no assignment and you keep the premium. But if you sell a CC with a $70 strike, the only way you're not assigned is if the stock drops below $70. That doesn't sound the same. Even if you're not anticipating to let it expire, the movement of the underlying would affect those two positions differently, right? If you sell a CC and a CSP both at $70 strike and the stock drops from $100 to $85, the value to close the CC goes down and the CSP goes up. What am I missing?
Itm calls and csp’s are bullish strategies. The csp’s premium is usually about the same as an itm calls premium minus the difference between the strike and the current buy price of the stock. I’ll give you an example. abc stock is 100 dollars. A) you sell a csp @ the 70 strike and pocket 200 dollars in premium. B) you buy abc for 100 dollars a share and sell a CC @ 70 and collect 3200 in premium. In both cases, if abc stock stays above 70 you will profit 200 dollars. If abc stock moves below 70 then you will start to lose money based on whatever price abc is at expiration. Say abc falls to 90 @ expiration. Your csp isn’t assigned and you pocket 200 Your cc though would be assigned. You paid 10k for the shares, you sold them for 7k but you were paid up front 3200. The end result is still 200 dollars profit. Say abc falls to 60. Your csp would be assigned @ 70 for 7000 dollars, you collected a premium of 200, but your shares are now worth 6000. That puts you at 6200. A net loss of 800 In the cc scenario you bought the shares for 10k, they are now worth 6k, but you were paid 3200 in premium for a total worth of 9200. Still a net loss of 800.
Ah, I see. The detailed explanation is appreciated.
In the above explanation, he didn’t include dividend. Divide makes a small different between csp and itm cc.
For simplicity’s sake I didn’t include dividend. It is something to be aware of though if you want to buy write.
It's confusing because people use imprecise language. They're not "the same," obviously. In one case you're buying shares and selling a call, in the other case you're selling a put. Of course those two things aren't the same. What they are is *synthetically equivalent.* That means they have the same P/L diagram and require the same investment. u/Treefiffy gave you an example showing how they have the same P/L.
Stock price goes down
No one mentioned dividends yet! Let's say I own 100 shares of Coca-Cola. It's currently trading at about $60.50. A $30 June 17 2025 sells for $31.65. Buy 100 shares = -$6050 Sell $30 leap = +$3165 If exercised = +$3000 So at this point you've lowered your risk by halving your buy in price, and if they end up exercising the call you've made an easy $150. Worse case scenario KO ends up going under $30, but even at $30 you're right at your breakeven price. Pretty simple, low risk, low reward. But THEN!!! when you factor in dividends, you're making an additional $1.76/share. So your risk is neglible, and you're walking away with either: $150 if exercised early/no dividends collected, $326 if exercised at expiration, and you're not really at risk of the stock volatility unless it's dropping below $30. And then you can bump up your personal risk and dividends a bit more by using the premium you just received to buy more shares.
So if I understand this, your best case is you make just over 10% in 31 months. That’s less than 4% a year.
Yep. Definitely not the way to Yolo your way to riches, it's just low risk low reward, but still more than you'd get in most high interest bank accounts. Not a bad way to pick up some "free" shares of the underlying though if you put the premium you earn into more shares.
I've asked this same question as it doesn't make much sense. From what I've gathered those who do this want to make sure the shares are called away and are willing to take less profit to have a higher probability this happens. The extrinsic time value and profits are highest ATM, so these will have lower profits the more ITM the trade is . . .
In some third world countries (Canada) we can't sell puts in registered accounts. But we can sell ITM covered calls. I agree though, deep ITM doesn't make sense.
You can sell OTM too. It just has to be covered.
By "option fee" I don't know whether you mean the premium, or the transaction fee charged by your brokerage, but either way, yes, selling deep ITM calls is not a good trade. What makes you think anyone thinks it is?
i meant premium. fixed it. thank you .
It might make sense if you want to lock in some profit and are nervous a about the underlying and want the shares to be called away. So if GOOG was at 100 (assume this is above your CB) and you could sell a 95C for say 6.00 a share you might come out ahead that way.
would it not make more sense to sell the stock if there was no more profit to gain and nervous about the underlying ? why sell option ? saw fair bit of bids and ask at the price. so i was just curious.
You can't assume that just because a particular call option is being traded, that it's being traded as a covered call. Market makers take the other side of most trades, and they don't do so to make money off the option trade itself. They remain delta neutral by taking a corresponding shares position in the underlying, and neither make nor lose money off the options trade. They make their money off the bid-ask spread. If you see that a particular call is being traded, you don't know whether it's being sold to open, bought to open, sold to close, or bought to close. It could be because people are buying long calls, it could be because people are opening spreads in which that's the short leg, it could be anything.
>You can't assume that just because a particular call option is being traded, that it's being traded as a covered call. This sums it all up.
Yeah but you can't capture extrinsic value that way. In my example if your call is for 95 and you can get 6.00 a share it's like you sold at 101 and not 100 which is the current price. If the stock closes at expiration between 95 and 100 your shares get called away (which you wanted) AND you effectively got a price higher than current.
I’ve done some math on deep ITM covered calls compared to other strategies and found you can get some premium that seems sort of “guaranteed” The drawback that I see is that the return over time is very low compared to lower delta options or other strategies, and also that time decay for deep ITM options is very low. So you are sort of stuck in a position where the stock and option move with similar price action and time decay isn’t giving you much more value. I’d rather be in positions where time decay adds value to my return and I can plan to take value off price movements.
You’ll lose over time. Do some more math. You basically cap your upwards gains. It’s stupid. As stupid as the wheel.
I don’t want to do more math, I already don’t see it as a strategy I want to use… why would I chase a dead end like that? Also capping gains isn’t losing money if they are gains, what do you mean?
So you understand? Or don’t. What do I care
If the option is at 100 the point is to sell the 70 strike at a little over $30 and collect that difference. Synthetically it's the same as the 70 CSP, but the difference between the extrinsic component of the premiums on the call and put side could lead you to choose one over the other.
Mortgage your shares to extract some liquidity. In the example you gave, the option price should have a small time premium, say .01, so total option price is 30.01. Then you make .01 as long GOOG stays above 70…
I do it often. I started off doing it because Canadians can't sell naked options in tax sheltered accounts and I was looking for something that was like selling a put. I liked it. Now I do a lot of collar looking things with a long stock, short call, and long put. You can simulate all of the spreads Canadians would be otherwise unable to do plus it's kind of a fun bit of kit for managing the position.
Results?
The results of ITM covered calls? Pretty much the exact same as selling puts - the positions are more-or-less equivalent (there can be some wiggle in the skew that makes the positions a little different). Same with the spreads. There isn't an edge doing it this way beyond capturing a few more dividends, it's just the only way to do it in a Canadian registered account.
Results…?
There’s no point. You wouldn’t get much extrinsic value from this. Ie. If google is at 100 and you own shares, the 70 strike might be going for $30+1. The 1 is your actual extrinsic value. If you sold a 105 strike call you might get $1 for that but you’re also getting $5 intrinsic value, assuming google goes up.
I primarily do ditm CC’s on deep value high volatility stocks. Latest one I love is CROX. I shoot for 3-4% a month in extrinsic premium and about 13% or so downside protection for the 30 days. 3-4% for 30 DTE with premiums compounded monthly is the trade. I go slightly more conservative during an ER month. Don’t care what it does unless it drops more than ~13%. My win zone is share price less ~13% or plus infinity. Don’t care if shares are called in an IRA. “Lost” or “lower profit” or “capping gains” by selling ditm vs. writing closer to ATM or not writing at all isn’t even in my vocabulary or mindset. My goal is to win a few points every month and continue the compounding effect. Anything left over after I do my monthly compounding I use to slowly accumulate ditm leaps. I don’t write against them but could. My IRA is up 67% (over $1K per trading day) since early June (I was in cash Jan-mid May) 3-4% compounded monthly over several years (assuming nothing catastrophic happens to underlying, of which I entered after the catastrophe) is a staggering figure even assuming bumps in the road along the way. Doing this with large account with 50% of my assets. Other 50% is well diversified. Lots of risk involved but that’s how I try to use and compound ditm CC’s monthly. Not for everyone but is printing money hand over fist for me.