Alan,
Using your covered call video example, the ITM premium is $8.05, but that is made up of $7.30 of intrinsic value and $0.75 of time value. So, if we buy back the option when its price falls to $1.60 (20% BTC) that $1.60 consists of all time value or upside in the transaction ($0.75) and the remaining $0.85 in intrinsic value. So, if we’re trading 5 contracts, we lock in a $425 loss (500 shares X $0.85).
Do I have this right or is there something I’m not seeing? If my understanding is correct, are you accepting a $425 loss because it is superior to possibly incurring a larger loss later?
Thanks,
John
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