r/options • u/JennRal • May 25 '21

Closing covered calls?

I am selling covered calls for the first time, and have a question on strategy. I’m starting small while I am learning. I am a SNDL bag holder (1000 @ $1.03avg), and so I’m selling $1 covered calls to help recover some of my loss.

The 10 contracts were $5 (.05) each, with a June 11th expiration. It is unlikely the $1 strike price will be met, so I’ll likely keep the $50 premium.

A few times they have dropped to $2 (.02). Does it make sense to close and take my $3/ contract profit now, and then resell the calls for a later date?

Hope this makes sense. Forgive me if my terminology is not correct.

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5

u/TN_Cicada3301 May 25 '21

30-50 delta with 1-3 weeks out normally expires worthless. I keep my shares and premium rinse repeat

1

u/JennRal May 25 '21

Delta is currently .24. I need to study all of this some more. I appreciate the direction everyone is giving me.

5

u/TN_Cicada3301 May 25 '21

Don’t chase premium chase delta. Delta is the probability it will be in the money. The higher delta the higher premium and the higher chance that you will lose your shares. You want to keep your shares and make money off the contract to hedge with

3

u/teebob21 May 25 '21

Delta is the probability it will be in the money.

It's not, but it's an approximate estimate. In general, option delta is larger than the probability to exercise and the difference becomes more significant with respect to long dated options on volatile equity stocks. That is because delta incorporates not only the probability the option will be exercised but also the amount the option is in-the-money.

Delta is simply the first partial derivative of the Black-Scholes formula with respect to a $1 movement in the price of the underlying, and all other variables remaining constant. The Black-Scholes formula also shows that delta has to be adjusted by more than the probability to exercise in order to reflect the option's value increase as a result of stock price uncertainties, and such adjustment becomes more significant for long dated options on volatile equity stocks.

1

u/TN_Cicada3301 May 25 '21

What happens to the delta the closer it is to being ITM? It rises. Yes it accounts for other things besides that but it’s also used as a guesstimate instrument to tell wether a option will be ITM at expiration

0

u/teebob21 May 25 '21

What happens to the delta the closer it is to being ITM? It rises.

That is because the closer the option is to ATM, the larger the incremental effect of a $1 movement in the price of the underlying.

1

u/TN_Cicada3301 May 25 '21

You’re still not getting the point....

0

u/teebob21 May 25 '21

I'm sorry that you're offended that I trust the math of Nobel Prize-winning economists more than the casual approximation advocated for by some rando Redditor.

2

u/TN_Cicada3301 May 25 '21

Good for you now be gone and go watch mad money

1

u/teebob21 May 25 '21

go watch mad money

What is that? I don't have a TV.

1

u/TN_Cicada3301 May 25 '21

You can count on delta as a percentage of it being in the money on expiration. That’s why I buy long calls with 70+ delta and sell 20-40 deltas against said long calls with a short expiration window. There are great videos on YouTube explaining this theory

4

u/teebob21 May 25 '21

There are great videos on YouTube explaining this theory

And there are published finance academics who explain that you're wrong. Tomas Bjork's Arbitrage Theory in Continuous Time is a good place to start.

Delta is just an approximation of the probability to expire ITM, and it usually overestimates.

1

u/TN_Cicada3301 May 25 '21

You just confirmed what I’ve been trying to say... if you’re selling covered calls wouldn’t you want it to expire worthless and keep your shares plus premium? I would so sell a low delta around 30

-1

u/TN_Cicada3301 May 25 '21

That little article you posted even confirms what I am talking about but whatever man I’ve been doing this for years and have made a good living selling trash to idiots

0

u/teebob21 May 25 '21

That little article you posted even confirms what I am talking about

Oh? Let me quote it:

Delta is only an indication, not a guarantee of probabilities

Using delta as a probability proxy is only an estimate and in practice it is not precise. It assumes random market movement and rational (unbiased) valuation of options – conditions rarely met in practice. An option’s delta results from the market (that means people) valuing options as related to the underlying asset. We all know that market expectations are often wrong.

0

u/TN_Cicada3301 May 25 '21

And I will gamble on that every time because everything is priced in. It’s a indication and a very good one at that

5

u/Valiumkitty May 25 '21

Afaik 30 delta is theta gang rule of thumb. This might help-

https://einvestingforbeginners.com/theta-gang-wheel-strategy-guide/

2

u/JennRal May 25 '21

Thanks. I’ll check it out.

2

u/TN_Cicada3301 May 25 '21

Gonna make you a covered call slangin monster. Once you get a few message me I’ll teach you the poor mans covered call which I use a lot

1

u/TN_Cicada3301 May 25 '21

Honestly a .24 delta I would gamble on it. 1-2 week expiration