TRADE IDEA: VRX "MONIED" COVERED CALL
Updated
Let's start with the metrics for this setup:
Buy shares at 24.54
Sell Nov 18th 22.5 short call
Whole Package/BE/Cost Basis: 20.40 db per 100 shares/contract (20.40 is also your cost basis and break even)
Max Profit: $210 per 100 shares/contract (if called away at 22.50)
ROC: 10.3%
Now, ordinarily, I like to do "OTM" (i.e., out-of-the money) covered calls where the short call is above the price of the underlying. I feel this gives me a touch more flexibility in working the setup over a substantial period of time should I ultimately decide I want to stay in the play for whatever reason (e.g., continuing high implied volatility, it's ripping to the upside, etc.). Additionally, OTM covered calls offer better ROC %-age metrics, assuming that price continues to move toward your short call.
With a "monied" covered call, you're limiting your upside profit potential from the get-go, although you can naturally attempt to roll the "monied" short call up and out for duration, assuming that you can get a decent credit to do so, which isn't always possible. However, in exchange for "going monied," you're getting a benefit: the stock price can continue to decline somewhat, and you can still make money. For instance, if price is still above the short call strike at expiry, your shares are called away and your profit is the short call strike price (x 100) minus what you paid for the setup -- in this case: $2250 minus $2040. If price is below the short call strike, but still above your cost basis, you still make money; the short call expires worthless (for which you book a profit), but the profit you made from the short call exceeds the price decline of the stock.
As with any covered call, however, you can lose money if price declines below the cost basis of your setup. In that event, I continue to sell calls against my stock, further reducing my cost basis in my shares until I'm able to exit the trade for scratch or a small profit.
Buy shares at 24.54
Sell Nov 18th 22.5 short call
Whole Package/BE/Cost Basis: 20.40 db per 100 shares/contract (20.40 is also your cost basis and break even)
Max Profit: $210 per 100 shares/contract (if called away at 22.50)
ROC: 10.3%
Now, ordinarily, I like to do "OTM" (i.e., out-of-the money) covered calls where the short call is above the price of the underlying. I feel this gives me a touch more flexibility in working the setup over a substantial period of time should I ultimately decide I want to stay in the play for whatever reason (e.g., continuing high implied volatility, it's ripping to the upside, etc.). Additionally, OTM covered calls offer better ROC %-age metrics, assuming that price continues to move toward your short call.
With a "monied" covered call, you're limiting your upside profit potential from the get-go, although you can naturally attempt to roll the "monied" short call up and out for duration, assuming that you can get a decent credit to do so, which isn't always possible. However, in exchange for "going monied," you're getting a benefit: the stock price can continue to decline somewhat, and you can still make money. For instance, if price is still above the short call strike at expiry, your shares are called away and your profit is the short call strike price (x 100) minus what you paid for the setup -- in this case: $2250 minus $2040. If price is below the short call strike, but still above your cost basis, you still make money; the short call expires worthless (for which you book a profit), but the profit you made from the short call exceeds the price decline of the stock.
As with any covered call, however, you can lose money if price declines below the cost basis of your setup. In that event, I continue to sell calls against my stock, further reducing my cost basis in my shares until I'm able to exit the trade for scratch or a small profit.
Note
I didn't get filled on this today and didn't have time to do "price discovery"; may try again tomorrow when I've got time to watch price movement around the mid price to see if I can get a decent fill.
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