Team Phoenix lab is getting assigned IWM naked puts today. That means we’re going to become the proud new owners of 100 shares which we will sell covered calls on. In today’s video, I walk through how to think about strike price selection and eventually rolling up or down.

Enjoy!

Notes

IWM March $177 naked put. Originally sold for $2.

Currently IWM is BELOW $177, the put is ITM and it’s expiration day.

1. If IWM closes below $177, we will automatically be assigned and wake up to 100 shares in our account on Monday. Cost basis on those shares will be $175. On Monday then we could sell a covered call.
   1. Pro of allowing assignment over the weekend is if we gap up on Monday, we benefit b/c we are long 100 shares UNHEDGED.
   1. Con of allowing assignment over the weekend is if we gap down on Monday, we don’t have a hedge. Long 100 shares UNHEDGED. I won’t get as much premium on the call on Monday.

*Main question is do you want the covered call position into the weekend or not.

2) Close the naked put today & immediately open a covered call position. Buy 100 shares & sell April call.

Call strike selection

1. My cost basis in stock is $175
2. The current stock price is $173

Which call strike do I sell?

1. Sell a strike where I at least break even in April. (DEFENSE) Usually you are selling ITM call. Lots of protection.
2. If I’m doing a traditional covered call where I’m bullish and trying to maximize gains, I’m selling OTM covered calls.
   1. Delta rule: 20-delta calls if long-term position and I don’t want to cap gains too quick.
   1. Delta rule: 30-delta call: happy medium between max cash flow & max gain
   1. Delta rule: 40-delta call: max cash flow (near-the-money calls have most extrinsic value)
   1. Let the chart be your guide. Sell higher delta calls when not as bullish.

Covered Call management (rolling)

                I’m long IWM @ $175, Short $182 for $2.20. New basis is $172.80

                Stock is too bullish>

1. Roll up the call when you reach the strike price. I like this when selling low-delta calls like 20-delta

Stock is too bearish>

1. Roll down the call when the stock breaks support and/or when the call premium gets too low & I want more protection.

$177 naked put, $2 premium

Basis is $175

Sell $168 cov call, $9 premium

Basis $166

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