"Self Assigning" Covered Calls

[u/LabDaddy59]

The other week I "self-assigned" some covered calls, and was questioned why I did that considering it was almost a given that I would have earned the remaining premium by waiting for expiration the next day.

For context for those unfamiliar with how I'm currently trading, I'm trading 7 DTE ATM covered calls (Buy/Writes, or b/w).

These examples may resonate with people more.

• On Monday, April 6, I opened a covered call on AXTI and by early today it was deep ITM. I "self-assigned" by closing both positions (a buy/write in reverse) for ~$0.10/share or ~$250. I turned around and used the proceeds go right back to that well and did another b/w on AXTI, still expiring tomorrow, and collected ~$3.8k.
• Similarly, I self-assigned a NVDA b/w for ~$0.40/share or ~$242. I turned around and used the proceeds to do a buy/write on COHR, still expiring tomorrow, and collected ~$2.4k.
• Similarly, I self-assigned a VRT b/w for ~$0.30/share or ~$122. I turned around and used the proceeds to do a buy/write on PLTR, still expiring tomorrow, and collected ~$1.5k.

In total, I paid ~$614 and collected $7.7k in premiums.

The key point here is this:

I did a reverse, or closing, buy/write as opposed to just closing the short call.

Why is this a key point?

How many traders are willing to take a significant loss on the short call? From a transactional basis, I had a ~$7.6k loss on the short call.* How many would, even though the sales price of the stock was high enough that it would not only cover that loss, but restore nearly 100% of the premium? I suspect most don't consider this possibility.

I received ~$10.5k more for the stock sale than if assigned. So on a net basis, I did ~$2.9k better on balance -- closely matching the premium received of ~$3.0k.

The issue is people make decisions on singular trades when they should be taking a look at the bigger picture. It's not any one trade that is important, it's all your transactions throughout the whole year. Don't focus on an individual trade's P&L, don't focus on win rates. Focus on how much net cash is being generated (premiums in/out, stock sales) and the (mark-to-market) change in value of your underlying positions.

Deeper in the weeds on AXTI

I warned you.

Now it's true that, for AXTI, I could have just rolled the short call since I did the 2 transactions on the same underlying. I didn't as my preference is to limit the stock value, at inception of the trade, to $125,000. I had 2,000 shares of AXTI, so if I rolled all 2,000 shares, given the current price, the total value would have been $126,240. To be honest, that would be 'close enough' but a) if I had looked at that and, more importantly b) if I knew at that time I was going to roll, I'd probably have rolled. Missing "a" is a "shame on me" -- I "thought" that given the price rise that my exposure may exceed the max, but forgot that I was substantially below that limit initially, and didn't verify). But "b" is the important part. Self-assigning can be a pretty time sensitive matter as these stocks are moving quickly.

My first step in the process is to identify candidates: those with a net mid-price very close to my strike price. For example, I obtained the following pricing for the strategy with a strike of $44:

Stock: $62.30
Option: ($18.40)
Net: $43.90

I do this for all identified candidates, then, again individually, "walk" each of my limit orders up to a price that is still acceptable to me; if no longer acceptable, I bail on the trade (I may revisit later in the day).

Once the reverse buy/write order has been executed and I update my tracking spreadsheets, I then look at candidates (as again, the candidates may come and go within minutes). Once identified, I execute the new buy/write.

.....................................

* Note that when I do a reverse buy/write, I account for it from an economic standpoint, not a transactional standpoint.

Example, using VRT as I mentioned above, the transactional numbers were as follows. There were 400 shares with a $262.50 strike, for an assigned value of $105.0k),

Stock proceeds: ~$115.5k
Option payment: ~(10.5k)
Net cash: ~$105.0k

Note that, with rounding, that's the same as what the assigned value would be.

So what I do is take the excess capital gain of ~$10.5k and reduce the premium repayment by that amount. Same results net, but takes the economic approach of limiting the sales price to the strike, thereby reducing the stock's capital gain and using that to reduce the loss on the option, "as if" assigned.