Comments on: Deep In-The-Money Strikes: A Can’t Lose Strategy? https://www.thebluecollarinvestor.com/deep-in-the-money-strikes-a-cant-lose-strategy/ Learn how to invest by selling stock options. Fri, 16 Mar 2018 11:11:32 +0000 hourly 1 By: Alan Ellman https://www.thebluecollarinvestor.com/deep-in-the-money-strikes-a-cant-lose-strategy/#comment-160730 Fri, 16 Mar 2018 11:11:32 +0000 http://www.thebluecollarinvestor.com/?p=9572#comment-160730 In reply to Steven.

Steven,

Options are rarely exercised early because the option holder will capture intrinsic value but lose time value Rare exceptions occur when there is a corresponding ex-dividend date prior to contract expiration. In these scenarios, early exercise may occur the day prior to the ex-date.

When a strike moves deep in-the-money, the time value component approaches zero and the time value component of the premium may disappear. This is known as the option trading at “parity” or all intrinsic value. If the option holder wants to own the underlying security, exercise will result in purchase at current market value. Only about 10% of all options are actually exercised. Most are closed prior to contract expiration.

Alan

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By: Steven https://www.thebluecollarinvestor.com/deep-in-the-money-strikes-a-cant-lose-strategy/#comment-160690 Thu, 15 Mar 2018 20:57:02 +0000 http://www.thebluecollarinvestor.com/?p=9572#comment-160690 Dear Alan Ellman,

I have a question for you.
In the Covered Call Writing strategy why does the holder of the american call option exercise immediately if the option is deep-in-the-money?
Is this is a porblem financial behavior? If it is, why? Could you kindly explain to me this concept?

Thanks,
Steven

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By: Alan Ellman https://www.thebluecollarinvestor.com/deep-in-the-money-strikes-a-cant-lose-strategy/#comment-19592 Sun, 01 Jun 2014 15:18:36 +0000 http://www.thebluecollarinvestor.com/?p=9572#comment-19592 In reply to Adrian.

Adrian,

My personal target for initial option return is 2-4% but each investor must decide on the appropriate target for their risk tolerance and goals. In a bull market, I will be more aggressive and vice-versa.

Alan

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By: Adrian https://www.thebluecollarinvestor.com/deep-in-the-money-strikes-a-cant-lose-strategy/#comment-19586 Sat, 31 May 2014 04:21:48 +0000 http://www.thebluecollarinvestor.com/?p=9572#comment-19586 Alright so to confirm I can keep a loser stock if has outperformed the market and am happy holding it, and if returns are over 4% then I will most likely check for stock news, as after all the IV will be higher too. thanks

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By: Alan Ellman https://www.thebluecollarinvestor.com/deep-in-the-money-strikes-a-cant-lose-strategy/#comment-19573 Fri, 30 May 2014 18:40:36 +0000 http://www.thebluecollarinvestor.com/?p=9572#comment-19573 In reply to Adrian.

Adrian,

The reason I developed the % return guideline was because it gives us a window into the risk of the trade. The higher the implied volatility of the option (market expectation of price movement in either direction) the higher the % return. My personal sweetspot for initial return is 2-4% (a guideline, not a hard-and-fast rule) and usually avoid ATM returns > 6-7% for this reason. This guideline can be adjusted for your personal risk tolerance. For example, in my mother’s account I use ETFs and target 1-2% per month. We have members who are much more aggressive than I am…one size does not fit all.

Each month a stock is evaluated on its own merit. I may keep a stock that was a losing position the previous month if, for example, it out-performed the overall market. The question I ask is where is the cash currently obligated to this stock best situated? In the same stock or another? If there is a better candidate, move your hard-earned money to a better place. There is no change is stock evaluation from the system you are familiar with.

Alan

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By: Alan Ellman https://www.thebluecollarinvestor.com/deep-in-the-money-strikes-a-cant-lose-strategy/#comment-19571 Fri, 30 May 2014 11:19:59 +0000 http://www.thebluecollarinvestor.com/?p=9572#comment-19571 In reply to Jay.

John emailed his response to me:

My June candidates were obtained from my new membership in BCI and I use IBD’d latest “top 50”, International Leaders, Section leaders,etc.I just started using the “EEllman Calculator” and found a few of my early Calculations when candidate stocks where in the money” I love having it to verify my own ROO calculations plus Downside protection, Upside potential” etc. Feel free to use the info if you find it useful. I still have a lot to learn using “Exit-Strategies”. Iv’e got your book on the subject so it will be another “learning’ adventure for me.Thanks again for your early assistance.

John

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By: Alan Ellman https://www.thebluecollarinvestor.com/deep-in-the-money-strikes-a-cant-lose-strategy/#comment-19569 Thu, 29 May 2014 16:26:58 +0000 http://www.thebluecollarinvestor.com/?p=9572#comment-19569 In reply to Adrian.

Adrian,

Thanks for clarifying that question. Periodically, the CBOE may select up to 10 individual stocks on which option series may be listed at $1 strike price intervals where the strike price is greater than $3 to but less than $50. Additionally, no $1 strike price may be listed that is greater than $5 from the underlying stocks closing price in its primary market on the previous day, and CBOE is restricted from listing any series that would result in strike prices being $0.50 apart.

That said, $1 strikes differences will allow us to hone in on our 1-month goals more precisely but I would not use that as my main reason for stock selection but rather the quality of the fundamental, technical and common sense data associated with the underlying. All things being 100% equal between 2 stocks, I would favor the $1 strikes.

Alan

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