ITM Writes Analysis

ITM Writes are the simultaneous writing of In-the-Money options with buying or short selling the underlying's stock. There are two types of ITM writes that are examined, "Bull Buy Stock and Sell In-the-Money Calls" and "Bear Short Sell Stock and Sell In-the-Money Puts".

Bull Buy Stock and Sell In-the-Money Calls (See term definition)

This type of write is designed to profit if the price of underlying does not move significantly lower.
The objective of this write is for the option to mature In-the-Money and to deliver the purchased stock to fulfill the Call option obligation.
Risk per share is the stock's purchase price minus the received option premium.
Maximum profit is the received premium plus the call_strike_price minus the stock_purchase_price.
Typically return on risk is moderate, the probability of profit is very high, and the probability of losing the entire amount risked is similar to a long stock position.
Example: A $32 Call is sold for $2.70/shr and its underlying stock is purchased for $33.90. The Call expires in 60 days. The maximum profit is $0.80/shr. If the stock finished above $32, your 60 day return is 2.5% (15% annualized), and the probability of making a profit is 96%.
This write is popular when the underlying's price is expected to remain near its current price and an In-the-Money Call is significantly overvalued.
Look for writes that have maximum profits substantially higher than your "per share" brokerage fees, good return on risk, very high break-even probabilities, and positive "expected values".
This analysis facilitates investor decision making by computing maximum profit, amount risked, annualized gross return, break-even price, break-even probability, and expected value.

Bear Short Sell Stock and Sell In-the-Money Puts (See term definition)

This type of write is designed to profit if the price of underlying does not move significantly higher.
The objective of this write is for the option to mature In-the-Money and to use the stock received from the Put to close the short stock position.
Strictly speaking, risk per share is unlimited, similar to that of a short stock position. The analysis program calculates the 99% probability price point and uses that price minus the received Put premium as the maximum risk amount.
Maximum profit is the received premium plus stock_short_sale_price the minus the put_strike_price.
Typically return on risk is moderate, the probability of profit is very high.
Example: A $30 Put is sold for $2.00/shr and its underlying stock is sold short for $28.52. The Put expires in 25 days. The maximum profit is $0.52/shr. The 99% probability price point is calculated as $63.65, so the amount risked is $33.13. If the stock finished above $30, your 25 day return is 1.6% (23% annualized), and the probability of making a profit is 95%.
This write is popular when the underlying's price is expected to remain near its current price and an In-the-Money Put is overvalued.
Look for writes that have maximum profits substantially higher than your "per share" brokerage fees, good return on risk, very high break-even probabilities, and positive "expected values".
This analysis facilitates investor decision making by computing maximum profit, amount risked, annualized gross return, break-even price, break-even probability, and expected value.

Analyzer assumptions:

Required multi-legged trades are executed efficiently.
If options are assigned, they are assigned immediately before expiration.
The market data delay does not invalidate the analysis.
One option contract covers 100 shares of underlying security.
The option strike price compares directly to the underlying's price. (Converted options, due to events such as mergers, sometimes compare with a multiplier.)
Dividends are treated as continuously paid out.

Analyzer operation:

Historical data is retrieved on the underlying security, and historical volatility is calculated.
The option chain for the underlying is retrieved and the options in the chain are screened by their volume and their "safety margin".
Options, which pass the screening criteria, are analyzed.
Analysis results are compared against filtering criteria.
Results, which pass filtering criteria, are displayed.

Screening criteria:

Effective use of screening parameters will help conserve the user's allotted monthly transactions.

Percent safety margin:

This parameter specifies a series of safety margins separated by commas.
Example: 5,9,20
Safety margin 1 is 5%
Safety margin 2 is 9%
Safety margin 3 is 20%

The safety margin is the amount the price of the underlying stock may change in the unfavorable direction before the write no longer pays off at maximum profit.

Each safety margin is applied to successive expiration periods. That is, safety margin 1 is used to screen the options with the nearest expiration date, safety margin 2 is used to screen the next nearest option expiration date, etc.

Include options with the previous day's volume more than ___.

Checking the box for this parameter will activate the liquidity screen. Only options that have a previous day's volume greater than the specified amount will pass the screen.

Analysis parameters:

These parameters are used as input to the analysis.

Ticker Symbols:

Up to ten underlying stock or index ticker symbols may be entered for analysis. Use commas to separate ticker symbols. This field is not case sensitive.
Example: IBM,csco,qqq,LU

Risk neutral annual growth rate: (term definition) ( tutorial)

The annualized expected rate of investment growth. Because of the uncertainty involved in choosing this number, the analysis programs allow you to specify a range for it. The minimum value of the range is used for calculations that would show profit most strongly under bullish conditions. The maximum value of the range is used for calculations that would show profit most strongly under bearish conditions. This introduces a degree of conservatism (worst case analysis) into the result.

Number of contracts to be traded = ___.

This field is used to calculate brokerage fees on write's net profitability and expected value. Brokerage fees often have a significant impact on write profitability. (See Brokerage Fee Calculation)

Filtering criteria:

These parameters are used to filter the results of the analysis. Effective use of this parameter will make the analysis report more readable by excluding reporting of option data that is not of interest.

Include only writes with maximum profit of more than __.

Checking the box for this parameter will activate the gross maximum profit filter. This value should be set to pass only writes that would result in profits meaningfully higher than your per share brokerage fees. Example: If your fees are $.10/shr, you might require at least $0.25/shr gross profit. Note that even in this case, you are giving your broker 40% of your potential profit.

Include only writes with annualized maximum returns of more than __%.

Checking the box for this parameter will activate the maximum return on risk filter. The maximum return is defined as the maximum gross profit divided by the amount risked.

Include only writes with expected values of more than __.

Checking the box for this parameter will activate the expected value filter. The impact of brokerage fees are included in the calculation of expected value. (See the "Expected Value" description in the site's education section.)

Include only writes with annualized net returns of more than __%.

Checking the box for this parameter will activate the net return on risk filter. The net return is defined as the expected value divided by the amount risked. Note that this filter is ignored for short put options.

Report description:

The analysis report consists of a section for each underlying security. The section header reports screening and filtering statistics.

The first column displays the underlying's symbol.

The "Last" column displays the underlying's last trade price.

The "Buy@Last" column is displayed for "Bull Buy Stock and Sell In-the-Money Calls" writes. The column displays the underlying's symbol and its last trade price. Example: INTC@28.52 means stock INTC last traded at $28.52 and it is presumed that it can be purchased at that price.

The "Sell@Last" column is displayed for "Bear Short Sell Stock and Sell In-the-Money Puts" writes. The column displays the underlying's symbol and its last trade price. Example: INTC@28.52 means stock INTC last traded at $28.52 and it is presumed that it can be sold short at that price.

The "Sell@Bid" column displays the option symbol (without .o suffix), strike price, and current Bid price of the short option of the write. Example: INQVF(30)@2.00 means option INQVF.o has a strike price of $30 and has a current Bid price of $2.00.

The "Days" column displays the number of days remaining before option expiration.

The "Volume" column displays the most recent session's volumes for the specified short option.

The "Safe" column displays the write's safety margin.

The "Break Even" column displays the write's Break-Even price.

The "Maximum Profit" column displays the maximum gross per share profit achievable by the write.

The "Risk$" column displays the per share amount risked (maximum gross loss achievable) by the write.

The "Annual MaxRtn" column displays the annualized maximum gross return on risk of the write ((MaxProfit/Risk$)/(Days/365)).

The "Prob Profit" column displays the write's Probability of Profit. (See the "Probability of Profit" description in the site's education section.)

The "Net ExpVal" column displays the write's per share Expected Value, including the impact of brokerage fees. (See the "Expected Value" description in the site's education section.)

The "Annual NetRtn" column displays the write's expected annualized return, including the impact of brokerage fees. This value is the annualized expected value divided by the amount risked.