OPENING: EWZ SEPT 31ST 31 MONIED COVERED CALL
... for a 29.39/debit per one lot.
Metrics:
Max Loss: 29.39 per contract on setup
Max Profit: 1.61 per contract on setup (5.48% ROC)
Break Even: 29.39 on setup
Delta: 37.54
Theta: 1.40
Notes: Roll the short call out on significant loss of value,* to maintain the desired net delta of the position, and/or to defend the break even. I would note a couple of things: (1) The Max Loss metric assumes you do nothing (no rolls) and that the underlying goes to zero, which is theoretically possible, but unlikely, since it's an exchange-traded fund made up of multiple moving parts, as opposed to being a single name underlying. (2) Similarly, the Max Profit metric assumes you do nothing, and that the underlying finishes above the short call strike at expiry. Rolling out the short call for credit decreases your cost basis and break even, and therefore increases your profit potential.
The basic point of the strategy -- regardless of whether you go monied or sell an out-of-the money call -- is to reduce cost basis in the underlying over time without necessarily having to rely on favorable movement. Consequently, you can make money over time if (a) the underlying doesn't move; (b) the underlying moves in a bullish manner; or (c) the underlying moves bearishly --- as long as you are able to collect a credit for a roll of the short call. The only situations in which rolling produces diminishing returns is where (1) the underlying rips up such that the short call you're attempting to sell does not have significant extrinsic value, in which case, your best option is to exit the trade at or near max and re-up if a play remains attractive; or (2) where the underlying has lost so much value that you can't get paid for a reasonably delta'd short call no matter how far out in time you go.
Whether you go monied or out-of-the money is, in part, a risk tolerance choice. The trade-off you make in going deeper is that you potentially give up some profit potential on setup in exchange for a more forgiving break even. The primary reasons I go monied over out-of-the-money with these: (a) I'm just looking for a "trade," not an investment. If I was eyeing the setup as an "investment" and wanted to remain married to the shares, out-of-the-money would probably be the way to go; (b) I'm looking to preserve capital in the setup. This usually occurs where the stock I'm married to has had a huge up run and rewarded me hansomely, but I'm worried about this being the potential end of the ride -- I drive the short calls into the money to give me better downside protection; and/or (c) I lack conviction that the underlying will maintain its current level.
* -- The most often cited metric is to roll the short call when it's lost 50% of its value. However, a lot of the decision-making process behind whether to roll has to do with how much time is left in the setup. If the short call is at 50% max with four days to go and price is well above my short call, well, I just might want to let it play out. If I'm three days into the play and the underlying has dropped significantly, rolling out at that point makes more sense than waiting, since the underlying may continue to move against me and waiting to roll may not be beneficial for credit collection if that occurs.
Metrics:
Max Loss: 29.39 per contract on setup
Max Profit: 1.61 per contract on setup (5.48% ROC)
Break Even: 29.39 on setup
Delta: 37.54
Theta: 1.40
Notes: Roll the short call out on significant loss of value,* to maintain the desired net delta of the position, and/or to defend the break even. I would note a couple of things: (1) The Max Loss metric assumes you do nothing (no rolls) and that the underlying goes to zero, which is theoretically possible, but unlikely, since it's an exchange-traded fund made up of multiple moving parts, as opposed to being a single name underlying. (2) Similarly, the Max Profit metric assumes you do nothing, and that the underlying finishes above the short call strike at expiry. Rolling out the short call for credit decreases your cost basis and break even, and therefore increases your profit potential.
The basic point of the strategy -- regardless of whether you go monied or sell an out-of-the money call -- is to reduce cost basis in the underlying over time without necessarily having to rely on favorable movement. Consequently, you can make money over time if (a) the underlying doesn't move; (b) the underlying moves in a bullish manner; or (c) the underlying moves bearishly --- as long as you are able to collect a credit for a roll of the short call. The only situations in which rolling produces diminishing returns is where (1) the underlying rips up such that the short call you're attempting to sell does not have significant extrinsic value, in which case, your best option is to exit the trade at or near max and re-up if a play remains attractive; or (2) where the underlying has lost so much value that you can't get paid for a reasonably delta'd short call no matter how far out in time you go.
Whether you go monied or out-of-the money is, in part, a risk tolerance choice. The trade-off you make in going deeper is that you potentially give up some profit potential on setup in exchange for a more forgiving break even. The primary reasons I go monied over out-of-the-money with these: (a) I'm just looking for a "trade," not an investment. If I was eyeing the setup as an "investment" and wanted to remain married to the shares, out-of-the-money would probably be the way to go; (b) I'm looking to preserve capital in the setup. This usually occurs where the stock I'm married to has had a huge up run and rewarded me hansomely, but I'm worried about this being the potential end of the ride -- I drive the short calls into the money to give me better downside protection; and/or (c) I lack conviction that the underlying will maintain its current level.
* -- The most often cited metric is to roll the short call when it's lost 50% of its value. However, a lot of the decision-making process behind whether to roll has to do with how much time is left in the setup. If the short call is at 50% max with four days to go and price is well above my short call, well, I just might want to let it play out. If I'm three days into the play and the underlying has dropped significantly, rolling out at that point makes more sense than waiting, since the underlying may continue to move against me and waiting to roll may not be beneficial for credit collection if that occurs.
Trade closed manually:
Covering for 29.80/contract; .41 profit per 1-lot. Subbing in a more cap efficient Aug 17th 35 short straddle with similar delta metrics .... .