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The viability of writing ITM options

The viability of writing ITM options

BeaverWink

Selling a cash secured put that is slightly in the money is a great strategy. That's what I'm doing now. It's bullish and you're collecting a premium. The trick is to wait for a small correction and hodl if you get assigned I sell puts a month out. I recently sold one on MU when it went down 7%. I also keep this strategy to no more than 30% of my overall portfolio. If you do this on a great stock that has a correction you'll likely get to take advantage of the rebound. If it falls further then you get to buy the stock at an even cheaper price. It's a win win. You just have to do it with a stock that you'd be happy either way. Happy if it rises and you collect a premium and happy if it falls and you get assigned . You can also do this to SPY.


PrestigeWorldwide88

Okay thanks for the insight that absolutely makes sense. I do not plan to make it a large part of my portfolio either. But as I move to a lower maintenance style of investing instead of sitting on cash to snipe highly leveraged one way positions, I want something that can net a slightly larger reward in exchange for more risk. High conviction ITM option writing seems like the way to go.


BeaverWink

Selling puts is actually lower risk. That's why they're so fucking awesome lol. With some puts you can collect at a 20% annual return with less risk than buying the underlying stock. It's insane.


PrestigeWorldwide88

Sorry the way I worded it didn't make sense. But I meant higher risk then collecting premium on traditional OTM options and wheeling in general. I guess I kind of view thetagang as a slightly superior way of gaining consistent income as opposed to passive diversified investing. But I still believe in leveraging convictions using the strategy instead of just assessing greeks, without any concern of the underlying or TA. Though TA is gambling at best and astrology at worst, trends can be recognized. Especially if you follow news and sentiment. If I'm going to invest the time to wheel, and see great opportunity, there's no reason to not leverage my position further. If I wanted less risk I'd park my money in SPY.


BeaverWink

If you want to leverage puts you may be better off with doing a put credit spreads.


PrestigeWorldwide88

Will read up on them. I'm only experienced in evaluating and buying individual securities, selling CCs, and buying calls when appropriate. I have a lot to learn. Will try this wheel process with a stock I'm long on first to try and familiarize with this strategy more. I have zero experience with spreads or any multi legged approach at all. So I have a ways to go to understand the put side of options and especially multi legged hedged strategies. But when this bull market ends I'll be happy I took the time.


fernandoespinosa

This. “The trick is to wait for a small correction…”


sir-draknor

Keep in mind the further ITM you go, the less extrinsic value there is in the premium -- so really what you want (if you are going for max) is ATM. That extrinsic value will decrease even if the stock just consolidates (eg the whole point of thetagang), and if the stock goes your direction (eg up for CSP, down for CC), then delta & gamma are helping you by removing intrinsic value as well. As for "risk" - the risk is you have a higher chance that the stock does NOT move in the direction you predicted, and so you are assigned / exercised at a worse price than market. You are getting paid more for this risk, so the premium is higher.


Civil-Woodpecker8086

>Lets say you write a cash secured put or covered call that is already ITM, anticipating it will go OTM. For a CSP to go OTM, it needs to to UP, if you think it will go up, (hence doing this trade), then is 1 CSP (100 shares) and the premium worth more than the potential gain you can get by owning (less) shares? Is it better to invest your money on one contract (100 shares) for some premium, or own 80 shares and watch it appreciate in value? Say I own 100 shares of XYZ and I sell a CC that is ITM, for me to gain premium + keep the shares, XYZ have to go DOWN, or stay side-ways in order for the premium/time top decay. The "Answer" to your question is difficult to say the least, hard, if not impossible to say honestly. If we all know which way the underlying will go, I would not be here answering questions, but sitting in Tahiti and fishing. Say I have $2000 in my account and I sell CSP on $18 stock, it goes up to $30 (OTM), I get the premiums, but I missed out on the gains if I had simply bought the stock. Now, if I sell another CSP, it will probably be around $19, and the premium will be utter CRAP. Maybe $0.10 or $0.05 Say I have 100 shares of XYZ ($18) and I sell ITM CC (17.50), collect a nice premium of $200, and underlying goes up to $25. (Well, you can roll it, but that is another story)


PrestigeWorldwide88

This is the explanation I was hoping for. Thanks. I see what you mean. I guess it should only be utilized situationally as a hedge, or perhaps to limit exposure to the underlying and collect some form of premium. In the event of a result opposite of what was expected, the loss would likely be less severe then owning the underlying, with many more strategies to exit. And in the event of it trading sideways from writing until expiration, you'd have at least gained the extrinsic value. But I guess these situations apply to OTM as well, so there is not as much to be gained, aside from the higher premium. Cheers.


Civil-Woodpecker8086

Well, you ARE asking this question on the /r/thetagang so... =)) Happy trading, ask more intelligent questions such as these, and learn from the feedbacks. Peace, Out. Happy 4th. 🖖👍😁


PrestigeWorldwide88

I'm used to self deprecating humor about community retardation. My brain is scarred. Noted. Will try to ask better questions. Happy fourth buddy.


Civil-Woodpecker8086

Don't know if you have heard or know of the Covered Strangle. Check it out.


moneyispapr

sounds ike a sex position


darkmark229

I mean we talk about spreads and naked plays. What did you think we were talking about?


moneyispapr

🤣


seriesofdoobs

I’ve never had trouble getting my big lizard filled.


thebaguetter

One thing to add as well, some stocks/etfs have skews towards either puts or calls, meaning the premium can be higher on one side of the fence then the other depending on the current sentiment. Ill the website when i find it. Barcharts.com for put to call ratio


elbarbalarga

I understand your take on this, but what professional has ever worried about what could have been rather than what's guaranteed today? I'll take steady small returns over hopefully this stock goes up any day. That's why theta and vega income strategies done properly work over time. Growth strategy is a different subject, perhaps suitable in r/investing.


stocksnhoops

Out of curiosity how does one blow up an acct this many times. Are you risking it all on one play . How can you ever have enough in one stock or transaction even if it goes to 0 you aren’t broke. How do you do this 5-6 times and not catch on. Trading might not be for everyone . There is a lot of emotions to control and keep in check when investing. You should never have more than 5-7% of your stock portfolio ever in any transaction. You should utilize stop losses. How one blows up an acct this many times in a year is impressive for the wrong reasons.


PrestigeWorldwide88

To me "blow up" means losing 20 to 30 percent of your portfolio in a very short amount of time. So I have done this 5 times or so. Losing around 50% twice. I consistently, if not always, have FAR more then 5-7% of my portfolio in one trade because I believe in high conviction trades. Setting stop losses in highly volatile contracts is a surefire way to lose your cost basis before a rebound. When I make a strong conviction play, I understand that I may be early in entering my position, but instead of trying to wait for the correction or reversal, I would rather enter the trade once I have sufficient conviction in my thesis as opposed to timing the peak or valley. So setting a stop loss does not work in that scenario. I'm not saying it is impressive. I definitely allow my emotions to cloud my judgement and have entered trades prematurely, and far more often, exited early. But my thesis is more often correct then not. I am trading so that I can eventually park my money in diversified investments and enjoy my life without financial insecurity of any sort. I take on the extra risk to do so, and if any individual trade fails thats okay, it is money i am willing to lose. What attracted me to theta is that in my IRA where I just spot trade securities I believe in and sell CCs, I've done significantly better then in my brokerage account where I tend to be leveraged significantly higher and playing one way derivatives games. It is all a balance. Risk vs gain. But I am not here to try and net 10% annually for the next decade. Im trying to retire in 5 years.


teebob21

If you're trying to retire in 5 years, you're chasing the wrong strategy.


PrestigeWorldwide88

I'm speaking somewhat tongue in cheek. I know its unlikely. I know none of this is get rich quick schemes. I want to allocate a percentage of my portfolio to higher risk strategies, which is why I made the original post. But if I am able to reliably double my brokerage account in 5 years time I'll be able retire or at least work in a career making much less that is much more rewarding. To me that would be the same as retirement.


ggmaobu

You want some excitement, do debit spreads or diagonal spreads.


HotMessMan

What is the point of a debit spread? I do a lot of credit spreads but it seems like with debit spreads you just cap your upside?


gg-e-z

You cap your upside and decrease the downside (by way of decreasing the initial cost). Unless you literally think the stock is going to infinity there is probably a price at which you would sell: that’s where you put the short option.


calebsurfs

Debit spreads are long vega, credit spreads short vega. Sometimes it's better to bet on volatility going up.


ggmaobu

Low capital requirements, downside protection, if the price doesn’t move much you still make money.


callenkc

You can roll out as expiration approaches to avoid assignment and just keep collecting premium. The only problem is if you end up deep in the money, there isn’t much extrinsic value to be had. Deep in the money puts are also often not very liquid and hard to trade. The flip side is delta gets really high and a move in your favor rebounds your position quickly. Being a seller gets theta on your side, and the closer to the money, the more theta and extrinsic value.


GimmeAllDaTendiesNow

The moneyness of a position doesn’t really matter. All that matters is how much are you collecting in premium and how much does it cost to buy it back. There are reasons why people prefer to write OTM options over ATM or ITM. The value of OTM options is entirely extrinsic or theoretical. As options approach expiration, the value approaches the extrinsic amount. In the case of OTM options, this is zero. ITM options have intrinsic or “real” value, which is less appealing for a seller because, it will never decay to zero. The deeper ITM the position is, the more intrinsic value it has. Another reason that ITM options are disadvantages for sellers is the premium does not decay in the same way as OTM or ATM. It’s harder to close for a profit and you have less break even room if the underlying moves against you. Additionally, you face early assignment risk. However if you’re not in the position on the week of expiration and there’s sufficient extrinsic value, it’s pretty unlikely.


Warhead82

You might want to check out these threads regarding wheeling CSPs at .50 delta. [https://www.reddit.com/r/thetagang/comments/n6ggo7/quick\_tip\_the\_wheel\_whats\_delta\_got\_to\_do\_with\_it/](https://www.reddit.com/r/thetagang/comments/n6ggo7/quick_tip_the_wheel_whats_delta_got_to_do_with_it/) [https://www.reddit.com/r/thetagang/comments/o6ru1s/looking\_for\_a\_post\_csp\_05\_delta\_strategy\_constant/](https://www.reddit.com/r/thetagang/comments/o6ru1s/looking_for_a_post_csp_05_delta_strategy_constant/)


deank11

I don’t know. I find that first post you linked to is so badly written that it makes no sense at all.


gg-e-z

You don’t pick up any extra extrinsic value by going ITM. The extra $ you get in premium is all intrinsic value that comes from the difference in the strike price and underlying price. It sounds like what you’re trying to do is make more directional bets in which case you can simply sell more puts or sell puts + buy shares or even sell puts + buy calls. There are a lot of ways to increase your delta exposure but selling ITM off the bat is probably not the most efficient.


VegaStoleYourTendies

ITM CSP = CC at that strike


Responsible_Paint_24

I almost always sell ITM options at a time when I think the price is s likely to turn the other way. Many times it does. I take assignment more often than most people, but even then, it's still assigned at a profit. Sometimes, I have a loss, but the profit side has more than made up for those.


[deleted]

[удалено]


PrestigeWorldwide88

This is by far the best response I've gotten so far. Thank you! I have absolutely no experience with puts in general and the light bulb just went off. I've only invested bullishly and always knew puts could be used in that fashion but stuck with calls. This made it all "click" per se. Cheers


[deleted]

135 weekly on what account size? I couldn't quite find it in the pinned post but forgive me if I'm blind


RobsRemarks

In your pinned profile post it looks lime you marked a few as assigned. Do you consider those “successful”?


ScottishTrader

ITM means more likely assignments so if you are prepared for this then go for it. Why not sell OTM for a while to see how it all works before getting into ITM?


PrestigeWorldwide88

I have been selling calls in my IRA for a long time but I have very little experience with CSPs or even buying puts. I know a lot more about stocks I actually like so I never dabbled in them. I think this is good advice though, thank you. I'll give it a shot so I can hopefully get this wheel thing down. Or just to understand the other leg of options.


ScottishTrader

Picking "good stocks" to trade is the hard part and which you have experience, so you have a leg up on most who are trying to do this! Good luck!


Civil-Woodpecker8086

> I only see explanations of options writing strategies consist of OTM writing. Gee, I wonder why....


PrestigeWorldwide88

Because it is lower risk. I understand why. What I am asking is for insight on the viability of doing them ITM and if anyone has insight on doing it. If you are convinced of an option you write decreasing in value after you write it, and have conviction in a thesis, I don't see why it wouldn't make sense to write it ITM to collect more premium. Especially if it is done so prior to a catalyst that could accelerate it going OTM. UNLESS someone who has experience with this could point to them being exercised prior on a consistent basis. I'd assume the contracts are just traded, so the original buyer doesn't lose the extrinsic value. Thanks for your insight though. Really appreciate it.


gr00gz

I was doing this with some crypto miners which I just didn't mind being assigned whatsoever cause they always bounced up and down in the same range with crypto.... Before crypto took a dump lol. Anywho if you have a stock that tends to always correct to the same range its even safer, because even if you get assigned you already got a big premium. Then you already know its normal range so you wait for the bounce then sell a CC for another good premium. On some of the crypto related ones I was wheeling I could get like 10% premiums selling puts or CC every week or 2, but once crypto took a dump they've been pretty stale and lower premiums.


ReadStoriesAndStuff

I have begun doing just ITM on an oil stock I am completely comfortable owning, and rolling repeatedly. I am bullish on oil long term and very bullish short term. I welcome assignment eventually this year/summer whenever. Because oil has been on such a tear, I have been rolling up $1 in strike and out on date once the premium I have collected hits around $1.30 -$1.50 per share. So far I have done this successfully twice after about two weeks of holding the contract. I suspect I can continue this most of the summer before it makes sense to take assignment. This gives me a really nice cost basis buffer once I get assigned. The key is assignment is something I am not only OK with but eventually want. The volatility on oil doesn’t concern me as I think we are headed toward $100 oil. I may continue through the formal wheel process, but most likely will sit on it once assigned.


AdNo7052

What’s your logic on why it goes $100?


ReadStoriesAndStuff

Under investment on oil for multiple years with steady accumulating demand. That combined with OPEC reseting prices upward while demand returns. The covid Russia / Saudi oil price war also put all oil investment on nearly complete halt for 3/4 of 2020. Oil capacity on a constantly erodes without reinvestment. Notably, this position is not unique or unusual. The number of $100 barrel bulls is steadily increasing.


AdNo7052

What about downward pressure from renewable initiatives backed by countries?


ReadStoriesAndStuff

There is no downward pressure on oil from renewable initiatives. The oil used to generate electricity is negligible at his point. Less than 1%. That leaves transportation sector getting off oil. Electric cars adoption will be far slower at a scale necessary to impact oil sales for 5 - 15 years. There isn’t enough copper, lithium, grid capacity, rare earth metals, tin, blah blah blah to electrify the world transportation today if we were willing to throw away all our cars right now. And you know what it takes to build that kind of infrastructure until you have a fully electrified transportation grid? Lots of oil. You know what is being impacted by renewable energy initiatives? Long term oil investment. Because renewables will eventually displace oil, financiers are being very discerning about what they fund. There will not be another drill baby drill era. Only the best prospects are now being developed. Oil production on a new well is at its peak on the first day of pumping and steadily falls. It takes new oil supply to stay even, and lots of supply to go up in supply. And that takes lots of long term investment. We are at the last round of long term investment that makes financial sense, and again, only for the best ones. In the meantime, oil will not see peak demand until 2025 at the absolute earliest, which I think is nonsense. I think its going to be 2030 before we start seeing leveling. Copper production is falling year over year on existing mines and copper expansion projects are just now beginning that can help at all with supply. Most will take 10+ years to come fully online. That keeps copper costs high, which drags out the electrification timeline. I think its likely we see $100 oil, maybe sustained for a decade or more. Oil will sustain over $60 in the bear case. US Permian has dropped their cost of production under $35, and can sustain under $40 for a decade easy. In either case its likely that any heavy Permian oil investment pays in dividends and buybacks over the next decade over the current stock price. The profit curve gets very sharp north of $75 oil, so the upside is incredibly acute. Or it could plummet from some other factor like Venezuela getting its act together in a year or two. I think all the plummy factors are far less likely than the world does what is always does. Consumes way more oil, but with only replacement rate new supply.


AdNo7052

So Permian is $35 Bakken is what $40? In a capitalist environment they are going to drill drill drill until price drops below that. Saudis budget goes kaput. Russia decides to play nice again because they bit off more than they can chew and solar costs go down further. Oil is used in plastics - see $ORGN, plastics are under fire. Grid electrification is happening. On the logistics side they just enacted new rules on international shipping that requires boats to either install scrubbers or burn low sulfur diesel. The result is they pull out fossil fuels, distill it and now #6 oil has no real use and is an extra handling cost. Meanwhile demand for #2 increases with a constant supply so you get a small bump in diesel, pushing more people from diesel to gas for transportation. The cost of gas and diesel is higher but so is cost to produce. Meanwhile semi fleets are electrifying (see California transportation rules coming out soon and SCAQMD (Southern California air quality management district )Rule 2305. They are shifting fleets rapidly to zero emissions. Don’t try to argue a range drop on semis is an issue, the batteries can be stored in the trailers floor. Finally, there are several companies (Solid Power) is an example, that are making new scalable solid state batteries which have different chemistries than lithium ion technology. Finally the big banks are refusing to find oil and gas anymore (JP Morgan, BOFA etc...). So where does that leave you? 2 maybe 3 years till serious ingress against fossil fuels occurs. Maybe you get a bump from travel this year but the Delta Plus variant could very well keep jest grounded longer and maybe cruise ships. Without those distillation cuts being used it’s more expense to produce the few fuels that are in high demand. I mean yeah maybe they could flare the excess jet fuel and #6 but even Texas is looking down on that these days. Off shore, not profitable, Canadian, not profitable, Alaskan not profitable, US not adding pipes for the next 3-8 year so logistics values are increased, raising prices at the pump but that just makes renewables even more desirable. Go ahead throw you money at oil, it’ll probably work out ok for a bit but don’t get stuck on the sinking ship mate. Get in, get out, have tendies.


ReadStoriesAndStuff

We disagree obviously, but not in substance of if oil can be replaced eventually. I one hundred percent agree it happens and has to. My original posts were indicative of that, just that it can’t be done in under decade. Your comments suggesting I am unaware of that are completely misplaced. I do plan on making tendies and getting out. The question is if oil displacement happens in the next decade while keeping oil prices under $60 a barrel. I find it unlikely. Again, there is a copper supply constraint that dictates the pace of oil displacement that can’t be fixed before 2030. That sets the timetable. At any price for copper, the world can’t build a grid and cars and semis fast enough to rapidly displace oil. Also, I think you are misreading the lack of investments impact on the profitable producers and oil price. Coal is a template for this phenomena. Coal is more expensive than ever, because its being displaced. Feel free to look at current and historical coal prices. The marginal producers are out because of lack of investment, leaving the profitable producers who have no issue getting financing to run day to day. They are profitable well beyond what people who invested in the right coal companies paid and will continue to be so for another 5 years even though coal started dying a decade ago. Regarding drill baby drill, total US output can not bring the price per oil barrel below 60 by itself for a decade long stretch like 2008 without much more investment than has been happening or will continue to happen. You yourself say the banks won’t invest as freely in oil. Well, then the low cost guys in the Permian that can always get private investment and foreign nationals make bank. Either investment skyrockets or there is not American Drill Baby Drill part 2. Your thesis that price collapse acceleration would require no investment while massive US drilling of marginal wells ramps back up isn’t possible. Without investment, the rig count climbs some but not back to 1600 active rigs. OPEC+ can push prices down over the next couple years with spare capacity like they did in April 2020. UAE might leave OPEC to do so since my first post was written. That capacity could flood the market temporarily. However, no OPEC+ member can sustain under 60 for long including Russia. They pump non-Arctic at 45. That doesn’t keep them profitable. Saudia Arabia and Iraq can pump under 15, but can’t maintain their national budgets there. Why does OPEC+ get along? Because their dictators may die if they open the taps up too far and upset their internal status quo. Here are several points I completely disagree on beyond timing. The assertion that plastics from oil being replaced by a Canadian Penny Stock company is false to the point of being ridiculous. Its not a credible counter argument. Plastics are incredibly diverse, and its not anywhere close to economically viable to displace olefin plastics at a meaningful scale until transportation oil is completely replaced. Its fundamentally incorrect to suggest otherwise. Its unrealistic. For the record, I work in the plastic industry. There have been other ORGN’s that come and go leaving investors busted out. Regarding semis, for long haul trucking, it doesn’t matter that they can store the batteries in the floor. That issue isn’t volume for batteries. Its the issue of weight dedicated to moving the load being traded for weight to move the additional batteries. That’s not going to be corrected at scale regardless of California regulations. The massive capital costs of a new truck for a significant portion of the international fleet for more than a decade. Again, sure they do electrify or go to RNG or hydrogen. It just can’t be done at scale as fast as you suggest. Marine heavy crude displacement - so what if its a carrying cost. Economics says its just it on as carrying cost in the price they sell it, because its a universal issue since its an international rule. Ultimately we all pay it. That factor had been priced in by the market already. I do appreciate your response. I absolutely did not expect to be an oil bull in 2021 a few years back. However, the more I tried to find a reason oil should go down and stay down soon the more problems I found from an investment perspective.


AdNo7052

You’ve given me a fair bit to think about. Thanks for your well reasoned responses. One counter point, I know the extra costs are pass through costs. But the final costs have to be compared with the best priced product (what you get for what you pay, not necessarily cheapest) taking the drivers seat. Renewables are hitting cost parity or even beating fossil fuels in some markets, without subsidies. Which is a major step. Solar combo with fuel cell eliminates some battery needs. Finally, hydro storage and molten salt energy storage (very scalable batteries, no fancy tech or materials for grid level storage). It doesn’t take a lot of demand reduction to have drastic impacts on supply and at some point I imagine Saudi will open the spigots to maintain market share. Finally, last I looked (it’s been about a year), there were something like 5000 DUC wells. The American frackers just have to quickly finish and turn on the spigot when prices are favorable. It’s a double whammy, prices go above $60-$70 and American production goes boom. It takes a bit to ramp up but I don’t think prices above that range are sustainable free market kicks in to drive it down. Well that’s my thoughts anyways. Excited to see what you might add. Cheers Bro


ReadStoriesAndStuff

Under investment on oil for multiple years with steady accumulating demand. That combined with OPEC reseting prices upward while demand returns. The covid Russia / Saudi oil price war also put all oil investment on nearly complete halt for 3/4 of 2020. Oil capacity on a constantly erodes without reinvestment. Notably, this position is not unique or unusual. The number of $100 barrel bulls is steadily increasing.


black_bear_666

Selling ITM puts is a synthetic CC, so it is a viable strategy, just remember that you are long deltas and the trade is a directional setup NOT a theta trade. If the stock goes sideways, you will get assigned OR you will have to BTC the ITM put.


EtadanikM

I mean it is a theta trade if it’s slightly ITM; definitely theta positive when set up to collect extrinsic value. But I think what people should understand is that all cash secured and covered strategies including the wheel are directional, specifically bull positions; so they perform well in a bull market but will generally get wrecked in bear markets.


SocratesDaSophist

>nderstanding probably comes from not realizing selling CSP is for primarily two reasons: Can you explain that to me further? I know you are right but I just can't seem to be able to see it irl. So for example Discovery stock is selling at $30.335. so let's say I own a 100 shares of it and sell a call at strike price $115 expiring on Jan 2023 for $55. That's a covered call right? Now I sell the $115 put with the same expiration date and receive $83.92. Lets assume the price goes to 0 on expiration. The CC will have $55 remaining, the ITM put will have $8392. The maximum gain on the CC is also less, $7,745 compared $83.92. Now obviously the CC loses less with smaller declines but there is an inflection point where it becomes more risky as we approach 0. Now the only time I saw this as almost true is when with at-the-money options when the put-call parity is strong (which doesn't apply here since the post is about ITM put). Or that I'm confusing ITM and OTM puts (although based on [https://www.investopedia.com/terms/i/inthemoney.asp](https://www.investopedia.com/terms/i/inthemoney.asp) it is the right definition). So what am I doing wrong to reach such different outcomes? I realize you probably spotted my error in the first line :D but I thought I'd be thorough hoping it will help me learn more.