Welcome to the Traders Laboratory.

Options Trading Laboratory Options traders discuss all your long and short term options trading here

Reply
Old 04-08-2014, 01:26 AM   #1

Join Date: Apr 2014
Posts: 1
Ignore this user

Thanks: 0
Thanked 0 Times in 0 Posts

Selling Naked Calls and then Potentially Buying Underlying Stock Later

Hi all,

I've been trading stocks for a couple years now but have only dabbled in some basic options trades (i.e., buying calls/puts). Anyways, I've been messing around with options more lately and recently came across a scenario in which I need some help.

Let's say you write an out of the money call with an expiration 1 year away. 6 months later, the stock is right at the the exercise. I realize you could close out the position by "buying to close", but this could be potentially expensive given the remaining time premium and the fact that the underlying share price is close to the strike. What if you just bought the underlying stock at or near the exercise price (assuming you had enough money to buy the underlying stock). Then, 6 months go by and the stock has gone up and the option is exercised. The losses on the call option is then cancelled out by the appreciation of the underlying stock you just bought, though you still have the premium. Assuming you can buy/sell the underlying stock as it moves around the exercise price, seems like you can always protect yourself against a loss (not including fees).

What am I missing? At best, the stock moves down and you pocket the premium. At worst, this seems like a way to generate yield (proceeds from writing the option / total cost of owning the stock).

Here's an example of how I'm thinking about this. Netflix Jan 2015 $450 call is selling for about $20. You sell 1 contract. If stock moves to $450 in 3 months, you buy 100 shares of nflx stock for $45,000. Jan 2015 comes around and nflx is at $500. At exercise, you have to sell 100 nflx shares at $450, so you receive $45k and then hand over your shares (which you bought for $45k). This would imply 4.4% yield (8.8% annualized, before fees).

This can't be a way to get some pretty good yield risk free, can it? Seems like I'm missing something very obvious.
mango is offline  
Reply With Quote
Old 04-08-2014, 02:41 AM   #2
Sky Blocks Champion

SIUYA's Avatar

Join Date: Apr 2010
Location: a city of canals
Posts: 2,222
Ignore this user

Thanks: 606
Thanked 926 Times in 638 Posts

Re: Selling Naked Calls and then Potentially Buying Underlying Stock Later

you will get whipsawed.
__________________
Context is king - and patience is more than a virtue, it is profitable.
SIUYA is offline  
Reply With Quote
Old 04-08-2014, 10:24 AM   #3

Join Date: Apr 2009
Location: Boca Raton
Posts: 1
Ignore this user

Thanks: 0
Thanked 0 Times in 0 Posts

Re: Selling Naked Calls and then Potentially Buying Underlying Stock Later

Some thoughts:

"On paper" - things look much cleaner than in execution - which is part of the basis of the "whipsaw comment" in one of the replies.

Selling naked calls a potentially unlimited liability. The moment you purchase the underlying the position becomes "covered".

If you own positions and want to protect - you can buy out of the money puts to protect the downside.

If you believe the positions may go up - but only to a certain point you can sell a call just above. (The call is covered because you own the position.) If the position does not reach that call strike price by the date then you keep the premium and the position. This can be done over and over in markets that smoothly rise.

In rising markets the following strategy is more difficult.
In choppy markets it works pretty well.
in falling markets - you have to be careful not to exceed your ability to buy what is "put" to you.

Selling puts, selling premium, selling insurance
You define a basket of stocks that you would like to own - but at a lower price than what is currently being offered. You sell out of the money puts 1,2 months out - but not exceed your capability to buy/own every single stock behind he puts sold. In a choppy market, stock gets "put" to you over time. Each time it gets put to you - you can attempt to sell a "call" covered because you own the underlying and collect the premium on both sides (put and call) and any issued dividends while you own the stock. When the Vix is 18 - 25 this works pretty well. Note that you do not get all the trades you want - you have to mange things carefully. In an environment like now, VIX<15 it is difficult to get much premium going.



Options can also help to "smooth out" abrupt trading behavior

R
rsn571 is offline  
Reply With Quote
Old 12-01-2014, 11:44 PM   #4

Join Date: Dec 2014
Posts: 2
Ignore this user

Thanks: 0
Thanked 0 Times in 0 Posts

Re: Selling Naked Calls and then Potentially Buying Underlying Stock Later

I generally prefer to limit risk to the max, so I just do weekly covered calls. To make it sweeter, I do deep ITM weekly covered calls, so that not only I only risk to buy the underlying, but I also give myself a cushion if the stock drops a bit during the week. At the end of the week, I'm happy to have my options exercised and keep the premium. The problem here is to find underlyings that give a good premium and I tried Www.myoptions4profit.com - Stock Market Trading, in-the-money Weekly Covered Calls, Options Trading Strategy. So far (6 weeks), it's been good. May just be a lucky streak, but as long as it's working...
toto is offline  
Reply With Quote

Reply

Thread Tools
Display Modes Help Others By Rating This Thread
Help Others By Rating This Thread:

Similar Threads
Thread Thread Starter Forum Replies Last Post
Selling Index Calls Igor Options Strategies 1 03-03-2015 02:27 PM
Buying Index Calls Igor Options Strategies 0 02-23-2012 10:16 PM
Selling and Buying a Stock on the Same Day billbose Beginners Forum 5 02-10-2010 04:27 PM
Writing Naked Calls jim2000 Options Trading Laboratory 9 11-13-2007 12:17 PM
Writing Naked Puts & Calls - Risks The Bear Options Trading Laboratory 27 06-12-2007 11:09 AM

All times are GMT -4. The time now is 06:53 AM.
Copyright ©2000 - 2017, Jelsoft Enterprises Ltd.
CS to VB integration by DeskLancer
2006-2011 Traders Laboratory, All Rights Reserved.