You're right that writing deep in-the-money calls means that you're selling less time value and more intrinsic value. But you have to consider this as part of the overall strategy.
If you're following the W.I.N. strategy, your stock has hit the upper BB, RSI has peaked, and you're expecting the stock to drop. Based on the BB and past performance, you have some idea how far the stock might drop, since you expect it to hit the lower band before it recovers. You also know what your net cost is for the stock. So, the strategy is to write calls that are either:
A) Currently at-the-money, to get the most time-value premium,
or
B) Will be slightly out-of-the-money when the stock hits the lower band, to get the most time+intrisic value premium now, with a low buyback price later,
and
C) Have a strike price higher than your net cost after writing the calls, so that if you guess wrong and get called out, you'll still make a profit.
In your example, you buy a stock for $20 and let it rise to $30. You then write a $20 call. If you sold the stock instead, you would earn a $10 profit, as you said. But, if you write the call, you'll get the $10 intrinsic value, and probably $2 or more time value, which drops your net cost to $8. If the stock price drops back to $20, you'll buy the call back for around $1.50, which will bring your net cost back up to $9.50, which is a somewhat more profitable position than your approach.
Doug. |
