In any case, you will be in and out of the trade so quickly that time decay should not be significant. Feel free to use the info if you find it useful. This is because the cost basis is much lower due to the collection of $1,480 in option premium with the sale of the May 25 in-the-money call option. These options have nearly a 100% delta, meaning that their price changes in step with every change in the underlying asset's price. It represents an underlying asset's expected . Deep Out-of-the-Money (OTM) options are those with strike prices that are far away from the current market price of the underlying asset. In that case, intrinsic value declines or completely disappears, leaving onlythe premium, which is at the mercy of time decay. RMBS closed on the date of our example at 38.60, and there were 27 days left in the May options cycle (calendar days to expiration). Deep-In-The-Money Call Options Explained - YouTube Shouldnt we before putting on a trade checkout the latest stats off yahoo first, to know how volatile a stock could be? Covered call writing is a strategy we use to generate consistent monthly cash flow, re-invest profits and ultimately to become financially independent. Time decay can hurt option price as expiration nears. But covered calls are a different animal. Buying deep in-the-money (ITM) options is a good way of carrying out directional trading in high volatility market environments. To execute a covered call, an investor holding a long position in an asset then writes (sells) call options on that same asset. This is calculated based on taking the premium received ($120) and dividing it by the cost basis ($2,380), which yields +5%. The strategy of selling deep in the money calls is used when: You want to sell your stock. How do you roll deep in the money puts? Understand the Option Risk with Covered Calls. Futures Trading 20. By gaining exposure to a given . Emails: The disadvantage is that there may not be much time premium and you give up all of your upside potential.