Accounting for covered call

S

smooey

I have to ask a question and its probably really stupid, but I haven't done a covered call before.

A couple days ago I sold a covered call on some stock I own. Since I have sold the covered call, the stock has risen to within a point of strike. My question is this. Each day the equity has been up, the call has gone up further from my sell price. My brokerage has been counting this as a negative charge to my account value each day this occurs.

Is this correct? I am familiar with shorting as I short stocks regularly, but I was under the assumption that since this was a covered call, it should not cause a negative to my account. When I work a simple version of this trade out on paper, it does not seem to add up correctly. I end up being shorted some profits on this trade the way they are accounting for this.

Any help is much appreciated. Thanks.

Smoo
 
Quote from smooey:

I have to ask a question and its probably really stupid, but I haven't done a covered call before.

A couple days ago I sold a covered call on some stock I own. Since I have sold the covered call, the stock has risen to within a point of strike. My question is this. Each day the equity has been up, the call has gone up further from my sell price. My brokerage has been counting this as a negative charge to my account value each day this occurs.

Is this correct? I am familiar with shorting as I short stocks regularly, but I was under the assumption that since this was a covered call, it should not cause a negative to my account. When I work a simple version of this trade out on paper, it does not seem to add up correctly. I end up being shorted some profits on this trade the way they are accounting for this.

Any help is much appreciated. Thanks.

Smoo
More...
it will all balance out when the position is closed.
 
It's wise to learn how options are priced, greeks, IV etc even if only writing CC's

You will be able to account for everything via the greeks, in this case, delta.

Cheers
 
WayneL is right, the option's delta will determine how much the call price changes relative to the stock price change. Your loss on the call increase is offset by your gain on the stock increase. You can easily calculate your maximum return whether you get called out or not. If you're not familiar with the formulas, you can read about them at

http://www.options-trading-resources.com/Covered-Call-Option.html

You can also download a free covered call evaluator at

http://www.options-trading-resources.com/Option-Trading-Software.html

Hope this helps,

Steve Rosenbaum
http://www.options-trading-resources.com/EliteTrSig

Option Trading tools the pros wish they had! A former Chicago Mercantile Exchange
employee reviews stock option trading software, books, and web sites and online income opportunity.
 
It's been said on the boards before, but if you like writing covered calls, just start selling puts naked. Synthetically it's the same thing, but you will be giving your broker less commission.

Remember:

Call - Put = + Underlying

therefore

+ Underlying - Call = - Put
 
Quote from emjroll:

It's been said on the boards before, but if you like writing covered calls, just start selling puts naked. Synthetically it's the same thing, but you will be giving your broker less commission.

Remember:

Call - Put = + Underlying

therefore

+ Underlying - Call = - Put
More...

Exactly emjroll. That should be the next area of required study for any new options trader (after pricing),synthetic positions...a big part of the jigsaw puzzle IMO.
 
Quote from vhehn:

it will all balance out when the position is closed.
More...

I think vhehn's is the best answer to the question you were asking smooey. Your option value IS going against you while you are still short the option. If you decided to sell your stock, you would have to buy back your short option (if you are not approved for naked calls) for a HIGHER price than what you sold it for. This rise in option value SHOULD be a charge to your account value, and your brokerage firm is calculating it correctly.
 
Quote from hopback:

that's retail margining for you...
More...
No, you're confusing Liquidation Value with Cash Available for purchases (or free cash). This has nothing to do with what you can borrow on margin. It's only to show what your account is "worth" if you close everything today. A covered call is not going to cost you any margin, or free cash. In fact, it's going to add to your cash available. But your Account Liquidation Value is not going to change until the price of the option you sold changes.

I would think this is a common accounting for all, retail or others.
 
You must log in or register to reply here.
Back
Top