rydad,
The advantage is a larger premium that creates a wider range where the call you have written is advantageous. If you write the AUG25 for .90 (still available at that price at today's close) you will be very happy if NEWP closes at 25. But what if it goes above 26 or comes back down to 20 by next Friday? Right now you can get 2.60 for the SEP25, and 4.00 for the NOV25. At August expiration, if NEWP has come down to 20 the SEP25 will have dropped about 1.70, almost twice as much as you can get for the AUG25. At about 22.30, the price on the SEP25 will have come down .90, so if the price drops below 22, you will be happy to have already written the SEP25 at a better price. If the price goes above 26, you will be somewhat pleased that you are not being called out, and have better upside potential (due to a lower cost basis) because of the higher premium collected. [These numbers are based on the theoretical movement of the options prices using the initial price and the volatility associated with those prices. NEWP currently has a volatility of 94%, and the ATM options are all nearly fairly valued.]
The NOV25 look even a bit better for the downside. At 20, the NOV25 will have dropped nearly $2. The .90 drop is in the same area as for the SEP25, around 22.20 to 22.30. And by collecting 4.00 you have created even more upside potential if the stock runs above 26.
The advantage of the higher premium for a longer time frame is that it puts you in a better position IF the stock makes a large enough move to "outrun" that smaller premium. By selling the near term call you are betting the stock will not go lower than 22 or much above 26 (or at least that it will come back to 26 so you can get back in at a good price). If you are right, you are rewarded for selling near term. If you are wrong, you have given up opportunity for a bigger time premium that lowers your cost basis more than the near term call. You may get that opportunity again if you are called out and the stock comes back to you, but if it goes below 22 and keeps going lower you will have to settle for smaller reductions in your cost basis going forward. That is to say, the premium you can capture from the SEP25 or NOV25 will be more than .90 less than it is now, so you have lost more in premium opportunity than you have collected from the near term premium.
Dan |
