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I would like to do the following:

Just before market close on a Monday, buy 100 shares of X and simultaneously sell 1 X call option deep ITM. I have sufficient funds in my account to buy 100 shares of X; no margin is involved.

I have two questions: -

  1. Is this considered a covered call or a naked call? As I understand it, the stock purchase settles T+2, so the stock is not registered in my name until Wednesday.

  2. But what happens if I get assigned on Tuesday? Presumably, since I don't yet own the stock, does this mean the answer to Q1 is that it's a naked call?

Any help or insight would be appreciated.

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When you buy the stock just before the close on Monday afternoon, you own it and all of the subsequent profit or loss accrue to you. The same holds true for the short ITM call. Settlement is effectively just back office procedure.

If you are assigned on Tuesday, the call is settled on Wednesday (T+1) and the sale of the underlying is settled on Thursday (T+2). The combination of the two legs is a covered call regardless of when assignment occurs.

FWIW, a covered call and a short put are synthetically equivalent so your Buy/Write trade involves an extra leg which means more commissions (if you are still paying them) and more slippage.

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  • Thanks for answering my question. And, also for pointing out that a covered call and a short put are synthetically equivalent. That is helpful for me to know, as it's a while since I traded options. – DownUnder Apr 29 '20 at 3:51
  • A detail I left out in my original question, as I didn't think it relevant. But, I'll add it now, to better frame my situation. I live in Australia and at this stage am planning to write the covered calls in my SMSF. A SMSF is regulated entity and it is acceptable to write covered calls inside a SMSF but one cannot with a short put. The rules do not allow it. Hence my strategy as proposed, but I may not use the SMSF, hence I will investigate the short put as an alternative. So, once agin, thanks for taking the time to answer. – DownUnder Apr 29 '20 at 4:01
  • @DownUnder - Covered calls and short puts have an assymmtric risk/reward ratio. You bear most of the downside in return for the possibility of a small reward. Vertical spreads offer a lower potential profit but they even out the lopsided R/R since the long put limits the potential loss. So if you can do verticals in your SMSF, look at them to see if the P&L is satisfactory. Note that low/no cost collared long stock (sell short OTM call to fund the purchase of an OTM put) synthetically equivalent to the vertical so that may be around a restriction against doing verticals. – Bob Baerker Apr 29 '20 at 5:24
  • Thanks for your suggestion regarding vertical calls and how a covered call has an asymmetric risk reward/ratio. One of the difficulties I have, whatever strategy I use, is that I live in Sydney, probably one of the worst time zones trying to trade on the NYSE. I just wanted to reply initially and I will probably have some more questions as I attempt to play with different simulations using an Excel spreadsheet. I'm sure there are better tools to use than Excel, something else I need to investigate. – DownUnder May 2 '20 at 3:44
  • @DownUnder - YW. Yes, there are better tools than Excel unless you're downloading more sophisticated Excel spreadsheets. If eligible, consider an account at ThinkOrSwim. It offers superior option analytics and an excellent paper trader that allows you to go back in history and test going forward. Don't mean to overload you but also take a look at Iron Condors and even Jade Lizards. Yep, screwy name ... I believe that it was dubbed Jade Lizard by Tom Sosnoff who sold TOS to Ameritrade for 600+ million. He's now the core of tastytrade which offers a lot of good educational material. – Bob Baerker May 2 '20 at 4:27

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