Beginner question on call options

S

swissarmyknife

I *think* I understand the general principle of call options but I still have much to learn: thanks in advance for helping me out in understanding things further.

1) Assuming I bought n shares of X at price P and plan to sell when it reaches 2P, regardless whether it goes up further (effectively missing on any upside, I get it). Is there any reason not to sell a call option on the n shares of X? Worst case, price 2P isn't reached and I still own X and receive the option's premium. "Best" case, price 2P is reached, my n shares of X are sold at 2P and I've collected the option's premium until then. Am I missing anything?

2) In a very practical way, I'm using Interactive Brokers as my broker. How do I go about selling a call option on a stock I own? How do I look for it? For instance, I bought a Lyxxor ETF on a European market: how do I find the corresponding available options? I've tried using https://contract.ibkr.info/v3.10/index.php but to no avail.

Thank you!
 
What you are asking about is selling covered calls. First, you need to own the stock of the company and you can sell a call option for each 100 shares you own of the stock. Say you bought 100 shares of XYZ at $48.00. You decide to sell the Sept 18 2020 $50 strike for $500.00. Now, you have $500 in your account. If XYZ is at $50.00 or higher on September 18, 2020, the option buyer can buy those shares from you at $50.00 even if XYZ is now selling for $60.00. You are obligated as this is a contract to sell those 100 shares of XYZ at $50.00. You keep your $2 gain on the stock which is $200 plus the premium $500 for your troubles. And of course, all your monies back. If the stock instead, goes down say to $47.00 on Sept 18 2020, you get to keep the $500 premium. You now have a $100 loss on the stock since, you paid $48 for it. However, you got $500 in option premium offsetting that loss. You still made $400 on it plus, you get to sell another call option. As long as your stock does not get called out or exercised, you can keep selling a call option on it. You are reducing your cost basis on the stock while, waiting on that stock to be called out and taken from your hands.
 
Thank you, yes absolutely, "covered calls".

In the second scenario you expose (price of $47): "you get to sell another call option". How would I know that the first option I sold is no longer valid / has expired, thus allowing me to sell again? If I understand correctly, those calls are valid until a particular date: I assume you meant that the date in question would have passed, correct?

It may be a silly question, but do those covered calls exist on all "main" stock and index ETFs? Is this something I would be able to see as soon as I own that particular stock XYZ or ETF?

Finally, if I'm happy to sell at $50 or keep the stock at $47 or below, no matter what happens (e.g. not too greedy, selling at $50, or keeping for the long term at $47), is there any reason not to do those covered calls?

Thanks again, this is really helpful.
 
Options have expiration dates and if it expires worthless because it did not reach the strike price, in this case $50 or higher, you get to keep all of the premiums. If you decide to close out your position by buying back your call option, you would get less than the $500 in premiums since, it would cost you monies to buy the option back. Say, the option was worth $100 when you decided to buy it back, you would get $400 in profits plus your shares in the stock. Now, you can at your decision, decide to sell another call option and try and make more monies on your stock.
 
swissarmyknife said:
I *think* I understand the general principle of call options but I still have much to learn: thanks in advance for helping me out in understanding things further.

1) Assuming I bought n shares of X at price P and plan to sell when it reaches 2P, regardless whether it goes up further (effectively missing on any upside, I get it). Is there any reason not to sell a call option on the n shares of X? Worst case, price 2P isn't reached and I still own X and receive the option's premium. "Best" case, price 2P is reached, my n shares of X are sold at 2P and I've collected the option's premium until then. Am I missing anything?

2) In a very practical way, I'm using Interactive Brokers as my broker. How do I go about selling a call option on a stock I own? How do I look for it? For instance, I bought a Lyxxor ETF on a European market: how do I find the corresponding available options? I've tried using https://contract.ibkr.info/v3.10/index.php but to no avail.

Thank you!
More...
You are missing couple of things, for sure.

1 - the P&L profile for "covered calls" is infinit loss / limited profit - https://www.investopedia.com/terms/c/coveredcall.asp

2 - not all stocks / etfs have options, and when they have, very few of them are actually tradeble. I am not familiar with the EU markets but on US market, out of 8300 stocks and etfs, less than 100 actually have meaningful options transactions.
 
andrew black said:
1 - the P&L profile for "covered calls" is infinit loss / limited profit - https://www.investopedia.com/terms/c/coveredcall.asp
More...

I looked at that web page, and I could not find any reference to "infinite loss." Even if it says that somewhere, it's not accurate. When you buy stock and sell a call, your potential loss is finite. The maximum loss occurs if the stock drops to zero. You lose what you paid for the stock, minus the premium you collected when you sold the call. You can't lose more than that.

BMK
 
BMK said:
I looked at that web page, and I could not find any reference to "infinite loss." Even if it says that somewhere, it's not accurate. When you buy stock and sell a call, your potential loss is finite. The maximum loss occurs if the stock drops to zero. You lose what you paid for the stock, minus the premium you collected when you sold the call. You can't lose more than that.

BMK
More...

Well if you stick to the letter then it's definitely not infinite. But any option trades at a price which is very very close to it's expected value over a large number of expiration cycles. If the stock is $100, a 1 month option (either call or put) would trade at about $2 (assuming a volatility of 20%). So that's 2% IF YOU GET TO KEEP THE MONEY. But that premium of $2 means nothing. You get to trade 12 times in a year. Over 10 years that option will sometimes expire out of the money and you'll get those $2. And other times it will expire in the money and you will lose $4, $10 or $20. You may lose in a single time what you made in 2 years!

So only THE MARGIN ABOVE THE EXPECTED VALUE matters. If on average the option is worth $2, you make nothing selling / buying it. And in general, options are always priced such that they make you lose money. On a $2 option, the margin over expected value may be just $0.2! So when you sell a covered call for $2 and buy the underlier for $100, think you're actually risking $100 in order to make $0.2!!! If everything's perfect on the long run you make some $2.4 PER YEAR on an investment of $100. But every trade you make, you risk 5000x more money than the margin profit you make!

And market is such structured that WITH 100% PROBABILITY a time will come when that stock will lose 20%,30% if it's an index. Or 90% of it's value if it's some stock.

So this is why INFINITE loss is the right term. On average YOU WILL LOSE 20-30$ and make $2. This is how options work for the small guy.

Have fun! :D
 
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