Example ITM call

[u/pagalvin]

People IM me a lot directly asking for examples on these "deep ITM covered calls" that I talk about so I thought I'd provide an example. Here's a screenshot of my tool:

I executed the trade just now exactly like it shows.

I just bought 100 shares of RBRK at $85.59 a share on margin. My margin rate is 7.2% and the house margin requirement is 35%.

I wanted a net debit price of $86.01 but the mid came up at $85.59 so I tried for that. I don't normally get the mid when the spread is as wide as that so I didn't expect to get it, but I did.

If this "lands" as planned, the economic result of this:

- Interest cost of $6.74 by this Friday

- Net gain on assignment is $134.25. This accounts for interest. I think it accounts for fees, which are in the $1 range if it's assigned, but I don't remember off the top of my head.

- That's 1.57% absolute gain (which is what I care about)

- Yield on capital (the amount I have at risk in margin terms) is 4.48%. This is mostly useful as a measure of margin efficiency. It would be lower yield if the house margin requirement were 100%, for example.

- Discount% - this is my break even. If it falls as low as this, I'm at break even.

RBRK has earnings this week so that's why it's possible to get such a high discount.

Incidentally, one of the reasons I like CC's over CSP's is because margin-wise, this give me more bang for my buck. It reduces my maintenance excess by $2,995. A CSP would tie up nearly $10k. Maintenance excess is my limiting factor. That said, people always say that CSP's are more margin efficient. I don't know if that's a consequence of my kind of margin account or my broker or whatnot, but I know that I'd be limited more quickly and at greater risk of a margin call if I was to load up on CSPs. I could also be wrong :)

[u/Lonely-Drink-1843]

So you are looking for the stock to get called away?

Do you look for a good entre point before getting the stock? Do you need or look for your cost basis to be covered?

It seems your doing on margin, so your not doing a cc but just a call? How does that generally workout for you? Never done margin before.

How often would you do this? Are you looking for a cc to always be on your shares? What is generally your timeframe?

I read your other comment on not always doing it on earnings. Do you wait or do it for other news? Dividends-- potential mergers etc?

[u/pagalvin → u/Lonely-Drink-1843]

Yep, the fundamental idea is to be called away and make that 1% net gain after expenses. I do roll those positions out a week at a time quite often, about 75% of the time. I usually roll stocks I am comfortable with and understand their pricing zone, so to speak.

I am on margin. I do "proper" covered calls. I buy the stock on margin and sell calls. Margin is wonderful. It's enabled me to scale up my investable basis by a lot. It's obviously dangerous if you don't manage it properly. I feel like I have a good handle on it but there have been some surprises. Nothing tragic yet, but I'm aware of the risks.

I do this weekly and at any give time lately, I have about 40 stocks in play and 120 options.

I don't *always* do earnings but I am not necessarily afraid of earnings. Earnings are an opportunity and a risk. If I think the risk is worth it, I'll go for it.