Put it together into a single transaction. When the short call is reasonably close to the money (say $50) then the bid/ask is small and if its on the same ticket then a changing share price won't matter.
In practice I tend to use market orders and enter the two positions separately. So far I haven't seen it make a meaningful difference.
NOT-ADVICE. And incoming book
Here's how I'm doing them. The short version is - open the buy-write on a down day / downward move in the share price. If you do, and you sell the call ATM, then you're hoping for a rebound that stays above the share purchase price and yields the max gain of the short call credit. Kind of exactly like a cash secured put
You -don't- want to continue owning these shares. If you're doing these weekly then the ideal state is for the shares to be sold every week. (This is the toughie for me - letting shares go).
The first point is that I'm using the cash that would otherwise be backing cash secured puts. My mental model, and I'm still adjusting to it, is that these buy-writes substitute directly for csp. I open them using the same logic and I manage them using related (but admittedly, somewhat different) logic and rules.
Because I use these as an alternative to a CSP, I open a new position on a down move - same as I would for a cash secured put. In a traditional buy-write the short call is sold at the same time, and ideally in the same transaction.
The short call can be sold ITM or ATM/OTM. I consider the latter to be the same logic - we're looking to earn money from both a gain in the share price as well as the short call credit. We are also taking on additional risk in the form of a drop in the share price.
With an ITM sale we're looking for a max gain from the original extrinsic value while also reducing the risk of a significant drop in the share price that would leave our newly purchased shares 'stranded'.
For risk management reasons I find myself drawn to the ITM call sale.
Wherever you position the short call strike, if you work the math out at expiration, every share price above the short strike results in a max gain on the position. Just like with a csp we're looking to earn the opening credit (extrinsic value), close the position, and start a new one when the time is right.
These outcomes assume that you take a full close of the position at expiration. But you don't have to!
Management has 3 broad options available.
- The obvious one - full close of the position every time. When the share price goes down enough you'll be realizing a loss.
- Shares go up enough - take the max gain and full close.
- More interesting is when shares are flat to down - we don't actually have to sell the shares on every position, and its reasonably straightforward to collect big credits while waiting for the share price to recover (more traditional cc logic, but with an underlying desire to sell and sell soon). As a bonus on a big move down the ITM call sale will generate a VERY large realized gain (while retaining the unrealized loss - its not free).
A present example. If I were opening a buy-write today I would probably be selling the 650 strike call. Buy shares at 708, sell 650 strike cc (next Friday expiration) for $71.50. That has about $13 worth of extrinsic value and that's the focus of the position for me - that is what I am looking to earn.
Assuming a full close I earn the $13 at every share price above $650.
If the shares go down below 650 then I can full close for the loss minus the $71.50 entry. Say share price of 600 I lose $108, receive 71.50, and lose a net 36.50.
BUT I also have the choice to close the short call and retain the shares (expecting a share price reversal). If shares drop to 600 then I can close the short call for 0 (realized gain of 71.50) while carrying an unrealized loss of $108. I might sell the 650 strike cc again for the following week and, guessing, collect another $13. If the shares return to anything above 650 (let's use 670 as an example) and I full close, then I earn the 71.50 plus 13 and lose the 58 from selling the shares at 650 (the call strike) and show a net realized gain of $26 or so on the position with no remaining unrealized gain or loss.
OR I could keep going, sell the 670 (ATM) cc and collect $20-30 (let's call it $20). If the shares finish above 670 and I (finally) full close then the overall position was 71.50 from week 1, 13.00 from week 2, $20 from week 3, and -38 from buying shares at 708 and selling them at 670. Net of 106.50 - 38 or around $70 for what turned into a 3 week position.
Each time I replace the short call with a new one, I also want to ponder whether its time to full close instead. This is a no-brainer when the share price rises far enough above the call strike. Say 800 share price with a 700 call strike - take the max gain and look for the next entry.
If the share price is near the call strike then it might be about the same to keep the unrealized loss/gain in the shares and replace the ending short call with a new short call.
Closest to advice I have - if this sounds interesting, then starting up a single buy-write is easy to do. Remember that unlike core shares, you DO NOT want to be attached to these shares. There are good results (relative to a CSP) from closing up shop every week, and there are good results from building a larger and larger net credit each week. Keep an eye on the call strike, to opening share price, to accumulated credit relationship. It's a more complex thing to track than other positions we've been doing.
In any case, my free cash is in better shape and I hope to pick up a handful of cheaper chairs tomorrow. I do still expect MaxPain to rule Friday, closing at $705+/-$4.99, but, for tomorrow I expect a drop below $700 to “test” or “scare” that weak put wall at 700. Maybe it will break and we stay below 700, maybe it won’t. GLTA
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