Positing Sizing an In the Money Covered Call

[nerdzkilla 10]

Hi,

 

I am a regular visitor in here. It is an excellent source of information for newbies like me.

 

I searched the forum for this but am getting no where. I just cant seem to figure out how to position size an in the money covered call.

 

for example:

 

How would someone position size a trade like:

Underlying Price: $40, sold call Strike Price: $38, Premium received: $2.50, IV is at 20%, Stop loss is set at stock price $38, at which point the system will tigger an order of selling the stock and buying back the call at a market price.

 

How would I position size this trade so it accounts for a sudden rise in implied volatility when stock price declines in value? To limit losses i would like the position sizing to account for loss in premium value due to increased IV. Can this be done?

 

Looked everwhere for this on the web. There is nothing out there except for a couple of videos where they dont mention volatility at all.

 

Regards,

Shiraz

[SIUYA 11]

I searched the forum for this but am getting no where. I just cant seem to figure out how to position size an in the money covered call.

 

for example:

 

How would someone position size a trade like:

Underlying Price: $40, sold call Strike Price: $38, Premium received: $2.50, IV is at 20%, Stop loss is set at stock price $38, at which point the system will tigger an order of selling the stock and buying back the call at a market price.

 

How would I position size this trade so it accounts for a sudden rise in implied volatility when stock price declines in value? To limit losses i would like the position sizing to account for loss in premium value due to increased IV. Can this be done?

 

As an attempt to answer......you cant reliably, as there are quite a lot of assumptions in this strategy.

such as, time to expiry when you put the trade on, the stop is hit, how quickly it occurs, is there a spike in volatility, or a slow and gradual decline, if there is a spike - how big is it (does vol go from 20% to 30%, 50%, 60%)

 

This quote "To limit losses i would like the position sizing to account for loss in premium value due to increased IV:" does not make sense....if implied vol increases, there is no loss in the premium value, you may/or may not end up with a loss on your option depending on the above mentioned variables.....For your position example the most you can make is 50 cents, and you have actually effectively sold a $38 put for this amount. (give or take interest costs).

 

This is what you need to look at when position sizing.....can you wear the cost of having to purchase the stock at $37.50 if need be. Position size off this maybe....