ITM Covered Calls

Posted by wonderdog on March 16, 2011 (11:13AM)


Would it be correct in saying that the only real risk in writing an ITM Covered Call is in owning the stock should the price be lower than the strike price at expiration?

According to my understanding, simplified calculations would be as follows (hypothetically)...

2300 Stock Purchase at $2.3 per share
1200 Option Credit at $1.2 per contract
1100 Total Debit
1000 Exercise Credit at $1.0 per share
0100 Profit

Assuming the call is exercised, the profit has been made. If the call should not be exercised due to a decline in the stock price below the strike price, you keep the stock at a cost of $1100 and all its associated risks.

Posted by OldFart on March 16, 2011 (11:22AM)

wonder - which stock is this and which strike r u selling - $1.00. Think about it this way - you pay for the shares $2.30 and are selling them at $2.20 + fees if the options are exercised

Posted by wonderdog on March 16, 2011 (11:25AM)

Sorry OldFart...I can often be not the brightest of persons.

Posted by wonderdog on March 16, 2011 (11:34AM)

The stock and covered call in question would be RAS at $2.28 with a covered call at $1.20 due in 31-days.

Posted by wonderdog on March 16, 2011 (11:37AM)

Something appears to be missing (no extra comments please). Think it may be the debit of the closed call from it being exercised.

2284.95 Stock Debit 2.28
1189.55 Option Credit 1.2
1095.40 Total Debit
0995.05 Exercise Credit
0100.35 Profit

Posted by wonderdog on March 16, 2011 (12:01PM)

Please just ignore this post.

Posted by wonderdog on March 16, 2011 (12:21PM)

RAS Apr 16 2011 2.00 Call

2274.95 Stock Purchase Debit at 2.27
0339.55 Call Credit at .35
1935.40 Total Debit
1995.05 Exercise Credit
0059.65 Profit

03.08% Profit
17.5% Downside Protection

Posted by spshapiro on March 16, 2011 (12:39PM)

WD, I don’t follow RAIT so I have no opinion on the stock.  You however, should, if you are going to do this trade.  You will be at some risk for a month, after which at best you will make a 3% profit.  The question you must answer is, “Is the risk worth it?”  In my mind A lot of the answer rests with what you think of the underlying.  Personally, I generally try to look for larger gains, but that is my preference and need not be yours. 

Posted by wonderdog on March 16, 2011 (12:39PM)

PWER Apr 16 2011 8.00 Call
5044.95 Stock Purchase Debit at 8.40
0441.15 Call Credit at .75
4603.80 Total Debit
4795.05 Exercise Credit
0191.25 Profit

04.2% Profit
09.6% Downside Protection

Posted by wonderdog on March 18, 2011 (11:23AM)

The RAS trade mentioned above and commented on by spshapiro was trading earlier at 2.23 with a .40 call bid as follows:

RAS Apr 16 2011 2.00 Call

2234.95 Stock Purchase Debit at 2.23
0389.55 Call Credit at .40
1845.90 Total Debit
1995.05 Exercise Credit
0149.15 Profit

08.08% Profit
21.1% Downside Protection

It was just a discovery on the use of ITM Covered Calls that caused me some excitement and question. The profit looked good for a months return and there was fair downside protection. Some would say when annualized the 8% turns into 96%. This does not really seem reasonable though as it would not be annualized. The trade is still available as of date though for a much lesser return.

Disclosure: Bullish on RAS. Owner of RAS.

Posted by wonderdog on March 18, 2011 (11:25AM)

Posted by stoicathos on March 18, 2011 (02:26PM)


Are you currently Bullish on the stock or more like long-term bullish? You probably don't want to sell a call on it unless you're neutral or bearish for the near term.

Posted by wonderdog on March 18, 2011 (02:44PM)

Long-Term Bullish. The ITM Covered Call would have been for short-term income with a long-term holding risk. Had already owned some shares before the find.

Posted by wonderdog on March 18, 2011 (03:01PM)

The risk at an 8% short-term (1-month) profit with 20% downside protection on a stock that has long-term upside potential seemed worthwhile. It was at $3.40 or so before the downturn. A volatile stock with a high beta that has already declined most of that beta during this said correction. For me it would have been a good trade. My funds are paralyzed anyhow presently. Again, it was just the idea of an ITM Covered Call that caught me by surprise as OTM Covered Calls are most commonly spoken of.

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