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Let's say I bought 200 shares of stock at $21.87. Then it ran up to $33/share. The premiums for selling a Feb 19 50 call options are $4.30. So I sold 2 of them. thinking it will reduce my cost basis if the stock price goes down or it will max my gains at $10.8k, which I'm fine with.
Now these sit in my brokerage as two different line items. So my question is, is this considered a covered call or a naked call sale? If someone executes on my call option will the brokerage just take my 200 shares or will I be responsible for coming up with the cash to purchase at the current share price? I was under the impression I was writing the sale of a covered call here. Just wanted to make sure I'm not wrong here.
Let's say I bought 200 shares of stock at $21.87. Then it ran up to $33/share. The premiums for selling a Feb 19 50 call options are $4.30. So I sold 2 of them. thinking it will reduce my cost basis if the stock price goes down or it will max my gains at $10.8k, which I'm fine with.
Now these sit in my brokerage as two different line items. So my question is, is this considered a covered call or a naked call sale? If someone executes on my call option will the brokerage just take my 200 shares or will I be responsible for coming up with the cash to purchase at the current share price? I was under the impression I was writing the sale of a covered call here. Just wanted to make sure I'm not wrong here.
That's a good question. I BELIEVE the only distinction is whether you own the stock during the contract period of the option.
My own experience:
If you own the stock, it's covered, and the brokerage will take the stock to fulfill the transaction if it's called away.
I've never sold a stock (or tried to) during an option period where I've sold a call on that stock. My brokerage restricts the ability to enter into naked options until you formally advise them you want that ability, and if they even let you selling a stock during the same period as a call option you sold without that level of clearance would make it naked (well, actually you're 'borrowing' the stock to cover it. True naked positions aren't actually allowed in the US). You'd owe whatever it took to buy that stock if the option expired.
If you want to sell and be safe, buy back an equivalent call option before selling the stock. I've done that a number of times.
Uncovered options expose you to the risk of losing a LOT of money, very quickly. Covered calls and cash secured equity puts are very safe.
That's a good question. I BELIEVE the only distinction is whether you own the stock during the contract period of the option.
My own experience:
If you own the stock, it's covered, and the brokerage will take the stock to fulfill the transaction if it's called away.
I've never sold a stock (or tried to) during an option period. My brokerage restricts the ability to enter into naked options until you formally advise them you want that ability, and selling a stock during the same period as a call option you sold without that level of clearance would make it naked.
If you want to sell and be safe, buy back an equivalent call option before selling the stock. I've done that a number of times.
Naked options are expose you to the risk of losing a LOT of money, very quickly. Covered calls and cash secured equity puts are very safe.
Perfect, this is what I needed to hear. I just wanted to hear others' experiences with how their brokerage handled it. I had thought about potentially buying a put to cover my downside, but then I wondered if that became naked because I have options attributed to the same shares and the put would expire at the same time the call did.
In this scenario you would be selling covered calls and could be hit with an assignment. If that happened at sell of 200 shares would be booked to your account at the strike price of the contracts. Listing them as two line items would be normal.
Only thing to be possibly aware of is after stock splits options contracts can adjust to more than 100 shares per. It’s often times identified as QQQ1 to start the options symbol vs QQQ
Perfect, this is what I needed to hear. I just wanted to hear others' experiences with how their brokerage handled it. I had thought about potentially buying a put to cover my downside, but then I wondered if that became naked because I have options attributed to the same shares and the put would expire at the same time the call did.
Long 200 shares and short 2 calls is covered adding a long put doesn’t change the fact you are covered and you as the long holder of the options give you control of what happens. If you exercised your puts(or they entered expiration in the money thus auto exercising) you would be naked at that point but not before
Long 200 shares and short 2 calls is covered adding a long put doesn’t change the fact you are covered and you as the long holder of the options give you control of what happens. If you exercised your puts(or they entered expiration in the money thus auto exercising) you would be naked at that point but not before
So you're saying that is a strategy I could use? For example, a $20 put with the same expiration costs $1.50 compared to the $4.30 in premiums I'm getting for selling the call, so conceptually buying the puts would mean that there is no way for me to lose money in that time period as the difference between the puts and calls would drop my strike price to $19.50/share and I'd have the right to sell for $20/share, is this correct?
So you're saying that is a strategy I could use? For example, a $20 put with the same expiration costs $1.50 compared to the $4.30 in premiums I'm getting for selling the call, so conceptually buying the puts would mean that there is no way for me to lose money in that time period as the difference between the puts and calls would drop my strike price to $19.50/share and I'd have the right to sell for $20/share, is this correct?
Well not exactly because if you are short you can be assigned at any time. So in your scenario you short calls could be assigned placing a sell of 200 shares and you are now exposed on your puts. It could marry up but. It always
Also is your scenario still assuming you are long 200 shares?
Well not exactly because if you are short you can be assigned at any time. So in your scenario you short calls could be assigned placing a sell of 200 shares and you are now exposed on your puts. It could marry up but. It always
Also is your scenario still assuming you are long 200 shares?
So, just to add some context it's CCIV, which I kind of see as a binary event (either the merger is true or it's not). Which means these shares either moon to $60+ (at least temporarily) or they drop to $12-$13/share. I'm fine with capping my upside at 145% if the merger is announced in the next 2 weeks. But if the merger is called off in the next 2 weeks I want to protect my downside too. If neither happens I'll just revisit this in 2 weeks. So in that sense I'm long in the fact that I think a merger will happen, but if it does I'm fine selling for $50. But I also see buying puts at about what I paid for the shares in the first place protects the worst case scenario which is that this drops to $12/share if Lucid calls off the negotiations and given that puts are so much cheaper than calls it seems like an arbitrage play in the sense that the cost of the put is a fraction of the premium of the call.
Does that make sense? BTW, I appreciate you helping me walk through this.
That could work out for you as you detail it, the only warning is when you are short you don’t control the action. Worst case scenario because I believe options trade a few minutes after 3pmcst is that the market closes@ 3pm, news is announced and the person holding the long calls exercises. You would be notified possibly overnight or the next day(might even be a Saturday) and you have some exposure from that point that you other option trade could mitigate but it simply depends.
That could work out for you as you detail it, the only warning is when you are short you don’t control the action. Worst case scenario because I believe options trade a few minutes after 3pmcst is that the market closes@ 3pm, news is announced and the person holding the long calls exercises. You would be notified possibly overnight or the next day(might even be a Saturday) and you have some exposure from that point that you other option trade could mitigate but it simply depends.
But if that's the case I'd be completely fine letting my put option expire worthless and eating the $1.30 as the cost of the insurance.
If I'm understanding what you're saying correctly let's say that at 3 PM today the merger is announced and it shoots to $65/share and the person holding my call options exercises them. He gives me $50/share and I give him the shares. I no longer have any shares, but I still hold basically a naked put. At that point if I just let the naked put expire what exposure do I have? It's my option to sell the shares at $20, it's not an obligation, right?
Also, I'm just curious, but why are you saying in that scenario I'd be "short" the stock? Is it just because I purchased a put option in that scenario?
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