Options question: Calls

[IDtheftV]

Originally Posted by SportyandMisty

When I'm in danger of being called, I roll the options forward by buying them back and selling new ones with a longer duration. Once I've had to short against the box.

So how often does this happen? I would bet it would tend be around 50% of the time.

If you are in danger of being called, then you, presumably would sell for $ x ( original sale ), but have to buy back for $(x + y) where [y] is the gain in the value of the option. When you sell the longer duration call ( call this x' ), can you get enough to pay for $ (x + y)?

Sell x $100 ... +100
buy back x ..... -100
buy y 50 .......... -50
sell x' 150 ..... +150

It sounds like it would work, but again, I might be missing something. If it works, then you wouldn't even need to own the underlying stock. You would just keep doing this till a downturn makes the options expire worthless and you keep the cash. It sounds too good to be true.

The risk I see is that x' will have to be a longer duration from sale than the original x to cover [y]. ( I'm assuming that the strike price would be the same. ) The longer your duration becomes, the longer downturn will be required for you to finally close out.

[Lowexpectations]

Originally Posted by IDtheftV

So how often does this happen? I would bet it would tend be around 50% of the time.

If you are in danger of being called, then you, presumably would sell for $ x ( original sale ), but have to buy back for $(x + y) where [y] is the gain in the value of the option. When you sell the longer duration call ( call this x' ), can you get enough to pay for $ (x + y)?

Sell x $100 ... +100
buy back x ..... -100
buy y 50 .......... -50
sell x' 150 ..... +150

It sounds like it would work, but again, I might be missing something. If it works, then you wouldn't even need to own the underlying stock. You would just keep doing this till a downturn makes the options expire worthless and you keep the cash. It sounds too good to be true.

The risk I see is that x' will have to be a longer duration from sale than the original x to cover [y]. ( I'm assuming that the strike price would be the same. ) The longer your duration becomes, the longer downturn will be required for you to finally close out.

Selling covered calls is a viable strategy and probably the one with the highest probability of being profitable. The problem with doing it especially with low basis stock is having to buy back the shorts if it moves against you. Also being short you can be assigned at anytime and I've seen this catch people off guard

[IDtheftV]

Originally Posted by Lowexpectations

Selling covered calls is a viable strategy and probably the one with the highest probability of being profitable. The problem with doing it especially with low basis stock is having to buy back the shorts if it moves against you. Also being short you can be assigned at anytime and I've seen this catch people off guard

Now I'm even more confused.

First, you mention low-basis stock. Why does your basis have any relevance to buying back the options other than if you decide to sell the stock ( to exercise the option ) then pretty-much 100% of the sale price is taxable.

Second, when you say "buy back the shorts" do you mean buy back put options?

Third, if we are talking about put options, wouldn't someone selling puts who owns the stock be selling naked puts? I am under the understanding that covered calls on the put-side requires you to be short.

[Lowexpectations]

Originally Posted by IDtheftV

Now I'm even more confused.

First, you mention low-basis stock. Why does your basis have any relevance to buying back the options other than if you decide to sell the stock ( to exercise the option ) then pretty-much 100% of the sale price is taxable.

Second, when you say "buy back the shorts" do you mean buy back put options?

Third, if we are talking about put options, wouldn't someone selling puts who owns the stock be selling naked puts? I am under the understanding that covered calls on the put-side requires you to be short.

He is selling covered calls so those are the shorts. His stock has low basis so getting the stock called away has high tax consequences