No. of Recommendations: 7
Mungofitch idea from post 4021.
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For all the reasons you point out, it becomes difficult to implement when the stock price is so high above its trend.
I mentioned the strategy only in passing, as a more or less automated version of what I often do, so there hasn't been any deep analysis or backtesting.
But there is no problem writing an in-the-money covered call. I have done it recently. Just expect high odds that it will be exercised!
If you have reason to believe a stock is most likely to trade around (say) $100 three months from now when the option expires, and it is trading at $120, there is no problem writing a $100 call option. Obviously the odds are reasonably good that it will be assigned--if so you just sell the stock and write it again. The rate of return on the time value is not that great, but the flip side is that if the price goes to where you expect, you make the total premium, which is a big number, over $20 in this case.
For example, I wrote some Berkshire November $445 calls on July 9 when the stock price was around $477, for a premium of $47.93. Net exit price on those is about $493. A guess of "normal" stock price at that time might be around $435-460?? (My chosen strike this time was a bit lower than usual for situation-specific reasons, but should still be nicely profitable)
Jim
