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Strategies & Market Trends : The Covered Calls for Dummies Thread

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To: LindyBill who wrote (1662)	7/29/2001 4:37:41 PM
From: Mathemagician	Read Replies (1) of 5205

Should I should write them ITM, or just OTM? Maximum profit for any CC is realized when the stock closes just below the strike on expiration day. If you think the underlying will go up, write OTM. If you think it will go down, write ITM. Essentially, that means picking your target for the underlying then choosing the lowest strike above the target is the optimal strategy. The difficulty, of course, lies in accurately predicting the closing price. Then again, if you could do that consistently you should be buying options rather than selling them. :) I think, in a nutshell, that's why picking the appropriate strike can more difficult than it may seem at first. This leads me (somehow) to another thought. In a tax-free account where one's only objective is to collect CC premiums, is it not a good strategy to pick a very volatile stock (that you fundamentally are OK with) and write DITM calls? This severely mitigates downside risk and you still get a pretty good time premium because of the high volatility. dM@WTFDIK.com

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