I've been learning about options and had sold a covered call before, but was curious about selling covered calls close to the share price with let's say 3 days to expiry. For example, I'd like to try to own 100 shares of APPL, sell a covered call at 220$ strike price, with the current share price of 218, expiring in 3 days. I'd get a 200$ credit, what's the downside to this trade aside from the capped upside potential and the share price dropping?
Covered calls close to the share price?
byu/Miserable-Bus-9039 inoptions
Posted by Miserable-Bus-9039
8 Comments
You have described the exact downsides.
You say you’d like to own 100 shares of AAPL, but you understand that you need to already own them in order to sell a CC, right?
You would only get a $200 credit if the premium was $2. The current premium for this Friday’s $220 expiry (240913) is $1.66 so, for a covered call where you own the underlying stock, you’d receive $166 to keep. However, if you wanted the $2 difference the nearest strike is $222.5 so the premium is $0.90 … so $90 to keep. If the stock moves up by <1%, you’d be exercised and it reads to me like you’d like to keep the stock so you’re giving yourself a lot of (emotional) hassle for, maybe, $90 that you have to pay 30% capital gains on (did you forget about taxes?). Not financial advice.
You’d make $461 by binding $21,800 of capital if the stock goes up. You can lose up to $21,300 if the stock goes down. It’s not worth binding that capital for so little profit
You’ve gotten a lot of good information in the other replies. The one thing that I would add is that you should not go near selling puts until you have a full grasp of options and risk management of them.
I only do that for the shares I want to dispose. If you are bullish on AAPL, I’d recommend going a bit further OTM
Not yet mentioned… be sure to look at earning dates as well when you’re picking your expiration. The exact same option a few days prior to, versus a few days after, an earnings date (for example) can sometimes be priced quite differently.
And also read up on the bid/ask spread. Some options are very liquid and have a narrow spread (bid/ask price are close), so your slippage (ask – bid) is low. This means you can theoretically open and close the position instantaneously without losing much money. But if the option you’re looking at selling has a wider spread, that means you may have to sell it for less than you want (in order to secure a buyer) and would make it harder to close the position if you decided that’s what you wanted to do.
you don’t get a $200 credit. You get the option premium, and only if the price closes at/above $220 or it spikes above and a call holder excercises will you get the $2/share.
Having said that, its not a bad try. The negative is if you’re playing overvalued hype names that have a strong potential to drop hard or with really good and strong companies hitting homeruns.
If you do it with companies you want at these prices, I suggest buying 200 shares, and sell 1 otm call. and every expiration roll over that 1 call. this will bring your cost on your core position of 100 shares down bit by bit.