If you are holding a stock bought for $40 with a current price of $35 and decide to write a covered call at $39, does anything different happen than if you were to write the call at $40?

At $39, premiums will be higher than $40. With the stock price below the strike, your stock isn't likely to be called away. The only danger is if the stock price rises above $39 right? Otherwise, you simply capture more premium.

  • Yes, the only difference is you will get more premium for the lower strike. Given your cost, the $39 will be riskier if somehow the stock closes above $39 at expiry so be sure the extra premium will compensate your risk. Also, given your situation, I wouldn't write the CC too far out with strikes below cost.
    – NuWin
    Apr 16 '18 at 4:26

The premium for a $39 call will be higher than that of a $40 call (same series). The lower call strike will have a higher probability of being assigned since the stock (XYZ) must rise less to reach the strike price. The delta of the call is an approximate of the probability that the call will be in-the-money (ITM) at expiration while Probability of Touch is even higher..

In your example, if your cost basis is $40 and you sell a $39 covered call then if the premium is less than $1, you are locking in a loss. If XYZ rises to the strike, most likely you'll have the opportunity to roll the call up and/or out for more premium. If it gaps well past the strike, you won't and the loss will be a fait accompli. ITM with a dividend complicates things further but let's not get too deep into the weeds.

  • +1, and if the option price is, say $3, OP has lowered his break even to $37. I've held stocks that dropped 50%, and came out at a profit by selling a series of calls in this manner. Apr 16 '18 at 14:27
  • A stock 50% underwater is essentially dead money and CC premium received on it will be peanuts unless you go far out in time or you risk locking in a loss. AFAIC, a vertical spread is a better strategy for opening positions since the amount of downside risk eliminated far exceeds the amount of upside profit given up. It avoids most of the dead money issue as well as keeps one with striking distance (g) of the strike, allowing ongoing premium flow. For existing long positions, collars achieve the same (synthetic). Apr 16 '18 at 17:11
  • In my case, it was a slow, steady drop in the stock, and the volatility was high enough that calls just a bit in the money was what I sold. You are right, if I owned a stock that was 50% down, it would be tough to break even with calls. Apr 16 '18 at 17:36

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