Selling deep ITM covered calls?

In order to get the premium, you have to wait for the price of the option to decay. It doesn't appear right away. As the value of the option you sold decreases, its value in your portfolio will increase because it's a short position.

The problem with selling ITM calls is that the buyer can force you to provide the shares at the ITM strike price. That ITM strike price is likely less than you purchased the shares for. So you're selling the shares for LESS than you bought them for. Which is a loss.

Case example:

  • Buy 100 AAPL shares at $150
  • Sell 1 contract with strike $100
  • Nothing happens right away.
  • As the option you sold nears expiration, the value will (hopefully) decrease and your portfolio sees the increase (because you're short).
  • Even though the option is making you money, the exercise will fuck you over:
  • If the buyer doesn't exercise early, the broker will exercise the ITM option automatically on the buyer's behalf
  • The shares you bought for $150 just got sold for $100
  • You lose ($150 - $100) * 100 = $5k

So the problem here is that if the option gets exercised, you lose stupid amounts of money.

/r/options Thread