[Josh7]

Hello,

I have a question as to what will happen with shares that are owned when a covered call is exercised. For example, if I purchase 100 shares at $50 and sell a call contract(covered call) for $2.00 at a strike price at $55. If the stock price goes to $60 and the contract is exercised this would mean that I would sell the individual my stocks at $50 despite the fact that they are worth $60 correct? So I would have $5000($50x 100 shares) and $200 from the premium I received correct? Or do I simply lose my stocks and keep the premium from the contract?

Thanks for reading

[MadMarketScientist]

Hi,

No, the contract would be exercised at the strike price of $55. So you would have 100x$55=$5500 + $200 premium for a total of $5700

MMS

[SIUYA]

Originally Posted by Josh7 »

Hello,

I have a question as to what will happen with shares that are owned when a covered call is exercised. For example, if I purchase 100 shares at $50 and sell a call contract(covered call) for $2.00 at a strike price at $55. If the stock price goes to $60 and the contract is exercised this would mean that I would sell the individual my stocks at $50 despite the fact that they are worth $60 correct? So I would have $5000($50x 100 shares) and $200 from the premium I received correct? Or do I simply lose my stocks and keep the premium from the contract?

Thanks for reading

MMS is right....

think of it in terms of accounting....it might be easier to understand. (or not)

At the start.....
Buy stock $50x100 = $5000 outlay
Sell calls $2x100=$200 inflow

then.....
Scenarios for exercise/expiry day are....
1....calls are exercised.

sell stock at $55x100 = $5500 inflow
buy calls back at zero (to take them off the accounting books)
Total PL realised = +$700

2...calls expire out of the money
no change in stock position - unrealised PL is the difference between the $50 price you originally paid and the current price
buy calls back at zero (to take them off the accounting books)
Total PL realised =$200

The only things you are interested in is
initial stock purchase price, strike price (if exercised) and premium of the option.
If the options are ITM on expiry day, and the calls are exercised, the final stock price is irrelevant to you as you have pre sold the shares at the strike price.

[Josh7]

Originally Posted by SIUYA »

MMS is right....

think of it in terms of accounting....it might be easier to understand. (or not)

At the start.....
Buy stock $50x100 = $5000 outlay
Sell calls $2x100=$200 inflow

then.....
Scenarios for exercise/expiry day are....
1....calls are exercised.

sell stock at $55x100 = $5500 inflow
buy calls back at zero (to take them off the accounting books)
Total PL realised = +$700

2...calls expire out of the money
no change in stock position - unrealised PL is the difference between the $50 price you originally paid and the current price
buy calls back at zero (to take them off the accounting books)
Total PL realised =$200

The only things you are interested in is
initial stock purchase price, strike price (if exercised) and premium of the option.
If the options are ITM on expiry day, and the calls are exercised, the final stock price is irrelevant to you as you have pre sold the shares at the strike price.

This makes it easier thank-you. It seems like this is the only option strategy that I have at my disposal since I was approved for a level 2 option trading with sharebuilder. I may have to switch to TD Ameritrade since it has more to offer.

[MadMarketScientist]

Originally Posted by Josh7 »

This makes it easier thank-you. It seems like this is the only option strategy that I have at my disposal since I was approved for a level 2 option trading with sharebuilder. I may have to switch to TD Ameritrade since it has more to offer.

You might also want to look at selling naked puts ... this guy has some interesting trades each month.

http://www.traderslaboratory.com/for...trade-log.html

MMS

[Josh7]

Thank-you I read through the post. Great strategies! I dont think I can sell naked puts . It seems like Sharebuilder is too basic, I am going to switch to TD Ameritrade.

this is all I can do:
Write a Covered Call
Close a Covered Call
Perform a Buy / Write (Buy a stock position and write a covered call)
Perform an Unwind (Close a covered call and sell a stock position)
All Level 1 strategies above, plus:
Buy a call (to open)
Buy a put (to open)
Sell a call (to close)
Sell a put (to close)

[SIUYA]

Originally Posted by Josh7 »

this is all I can do:

Write a Covered Call
Close a Covered Call
Perform a Buy / Write (Buy a stock position and write a covered call)
Perform an Unwind (Close a covered call and sell a stock position)
All Level 1 strategies above, plus:
Buy a call (to open)
Buy a put (to open)
Sell a call (to close)
Sell a put (to close)

I dont know how various levels work but it is interesting that who ever sets them clearly does not understand options and risk.
(unless I am missing something in their definitions)
most of these are just closing a position....there is only really 3 possibilities here....

Write a Covered Call
=
Perform a Buy / Write (Buy a stock position and write a covered call)
=
sell a naked put
.................the exposure is the same, it just might be your collateral instrument changes

Buy a call (to open)
Buy a put (to open)

I guess they have to start somewhere -
keep it small to start with, really understand how the options move, decay and react.
Always buy short options back when they get near zero, and remember the most you will make on them is on the day you sell them.

[Josh7]

I dont understand what you mean by Always buy short options back when they get near zero, and remember the most you will make on them is on the day you sell them. Can you explain? I noticed that this particular level involves great risk and it would seem more logical for Sharebuilder to have a level 3 which would enable credit/debit spreads to limit risk. I was informed that each broker has their own set-up for each level. Sharebuilder's level 2 may not necessarily be the same as another online broker.

Originally Posted by SIUYA »

Write a Covered Call
Close a Covered Call
Perform a Buy / Write (Buy a stock position and write a covered call)
Perform an Unwind (Close a covered call and sell a stock position)
All Level 1 strategies above, plus:
Buy a call (to open)
Buy a put (to open)
Sell a call (to close)
Sell a put (to close)

I dont know how various levels work but it is interesting that who ever sets them clearly does not understand options and risk.
(unless I am missing something in their definitions)
most of these are just closing a position....there is only really 3 possibilities here....

Write a Covered Call
=
Perform a Buy / Write (Buy a stock position and write a covered call)
=
sell a naked put
.................the exposure is the same, it just might be your collateral instrument changes

Buy a call (to open)
Buy a put (to open)

I guess they have to start somewhere -
keep it small to start with, really understand how the options move, decay and react.
Always buy short options back when they get near zero, and remember the most you will make on them is on the day you sell them.