NateC writes: If you did that tomorrow....would you then sell the May 65 CC, then the June, etc??
If my intention is income, and it usually is, I would sell the near term at the money month. This has some exposure early on. This is why I prefer less volatile stocks.
I always roll out. Let's suppose the new term month was selling for 1 3/4 bid 2 1/4 ask, and the Leap is 28 bid 29 ask. My initial order is buy x Leaps, sell near term month 60 net debit 27. Subsequent orders will be something like buy near expiry, sell next month out net credit 2. (Actually, the model I'm using for this explanation is running on the average net credit 1 5/8s ).
If you get exercised on one of these CC's
The point is not to get exercised. You only get exercised if you fail to buy the short term back. There are two ways to prevent getting exercised: 1) Never sell calls on stocks with dividends, a rule I frequently break because these are precisely the stocks which tend to be less volatile, and 2) always roll a position which sells at parity. In this instance, selling at parity means you get as much for the stock as you do the option. This generally only happens with DITM calls. The only ways an at the money call becomes DITM in 4 weeks is if it's a volatile stock, or someone wants to buy them.
You will usually find in such a case that buying the near term and selling the LEAPS results in a profit. You might also find that buying the near term, and selling ATM 3-6 months out will alleviate some of the expense of buying back the position. It could also put you into the interesting position of generating a short term loss to protect a long term gain. See your tax advisor.
In an ideal world, from your perspective, 18+ months out the stock will still be at its initial strike, the leaps will be worth 25, and you'll have generated $30 - $36 of income. In the real world, who knows? |
