I sold some covered calls for insurance protection (bad idea, I know). Now I am thinking about buying them back. The question is, can I sell some of the stock to use as buying power to reacquire the calls, i.e. can I go naked for one second then immediately buy back the calls? Or should I use another source of funds?
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Buying back covered calls
- Thread starter ferrycorsten
- Start date
Quote from ferrycorsten:
I sold some covered calls for insurance protection (bad idea, I know). Now I am thinking about buying them back. The question is, can I sell some of the stock to use as buying power to reacquire the calls, i.e. can I go naked for one second then immediately buy back the calls? Or should I use another source of funds?
why latter out at all unless you are speculating.. legging out of a trade as a way to recovery is a very very bad way to deal with your situation.. if you called it wrong in the first place what makes you such a pro that you can leg out ? i learned that hard way on that way.. and hindsight is a bitch.. you would be loving yourself if something else had happen.. hedging has costs... most of the times i've legged out in situations like yours i've gotton whipsawed..
I don't understand the phrase "reacquire the calls." If you have a covered call position, you are long the underlying and short calls. To exit your short call position, you buy (or acquire) them for the first time, aka a buy to close transaction.
Now, if you want to buy them in and sell a higher strike, you're going to have a buy to close transaction on the original lower strike and a sell to open transaction on the new higher strike. As long as you follow this sequence and aren't "over-writing" your stock position, then you're not naked and shouldn't need to raise cash prior to selling the higher strike price calls.
Now, if you want to buy them in and sell a higher strike, you're going to have a buy to close transaction on the original lower strike and a sell to open transaction on the new higher strike. As long as you follow this sequence and aren't "over-writing" your stock position, then you're not naked and shouldn't need to raise cash prior to selling the higher strike price calls.
Quote from Brighton:
I don't understand the phrase "reacquire the calls." If you have a covered call position, you are long the underlying and short calls. To exit your short call position, you buy (or acquire) them for the first time, aka a buy to close transaction.
Now, if you want to buy them in and sell a higher strike, you're going to have a buy to close transaction on the original lower strike and a sell to open transaction on the new higher strike. As long as you follow this sequence and aren't "over-writing" your stock position, then you're not naked and shouldn't need to raise cash prior to selling the higher priced calls.
Yes I am long the stock and short the calls and pondering whether to buy them back. I have thought about rolling up, out, etc. But what if instead I sell some stock while still being short calls, but immediately proceed to buy to close those calls with the cash from the stock sale? What is the risk then, ignoring the loss of original premium? That I would be naked for all of two seconds? Is that playing with fire?
P.S. I am very bullish.
Quote from ferrycorsten:
Yes I am long the stock and short the calls and pondering whether to buy them back. I have thought about rolling up, out, etc. But what if instead I sell some stock while still being short calls, but immediately proceed to buy to close those calls with the cash from the stock sale? What is the risk then, ignoring the loss of original premium? That I would be naked for all of two seconds? Is that playing with fire?
P.S. I am very bullish.
Very bullish means you want more long and less short .. get rid of the calls altogether...
Your not making sense. If your so bullish why leave open unhedge calls...
OK, I think I understand your scenario better, except for one thing - your mention of the need to sell stock to raise cash to buy in the original short calls. Your underlying should have moved up in price and your call position is being marked-to-market, so unless your account is facing a margin call from unrelated activity, I don't see why you need to raise cash to buy in your original short calls - you should have sufficient liquidity to do that now.
If you do sell some of your stock prior to buying in an equivalent number of calls, then yes, you are going to be naked some short calls. Is that playing with fire? No idea, but it's not for the inexperienced and depending on the type of trading privileges you have, it may be disallowed so the order(s) won't go through that results in a naked short call position.
If you're bullish and the stock isn't prone to extreme moves in very short time spans, I'd get your orders and limit prices lined up, buy in the lower strikes, sell higher strikes, and leave the underlying alone. And there's no rule that says you have to sell calls on the whole position; if you're very bullish just do a partial write.
If you do sell some of your stock prior to buying in an equivalent number of calls, then yes, you are going to be naked some short calls. Is that playing with fire? No idea, but it's not for the inexperienced and depending on the type of trading privileges you have, it may be disallowed so the order(s) won't go through that results in a naked short call position.
If you're bullish and the stock isn't prone to extreme moves in very short time spans, I'd get your orders and limit prices lined up, buy in the lower strikes, sell higher strikes, and leave the underlying alone. And there's no rule that says you have to sell calls on the whole position; if you're very bullish just do a partial write.
Quote from cdcaveman:
Very bullish means you want more long and less short .. get rid of the calls altogether...
Your not making sense. If your so bullish why leave open unhedge calls...
Let's say I received $1,000 premium from selling OTM covered calls on stock I already owned. No other cash in account. Let's say these calls go ITM and now cost $1,500 to buy back. Since I only have $1,000 in cash, can I first sell a small number of shares to increase my cash, then wipe out the calls? This would leave 95% of my position intact without capping my upside any longer.
Quote from Brighton:
OK, I think I understand your scenario better, except for one thing - your mention of the need to sell stock to raise cash to buy in the original short calls. Your underlying should have moved up in price and your call position is being marked-to-market, so unless your account is facing a margin call from unrelated activity, I don't see why you need to raise cash to buy in your original short calls - you should have sufficient liquidity to do that now.
If you do sell some of your stock prior to buying in an equivalent number of calls, then yes, you are going to be naked some short calls. Is that playing with fire? No idea, but it's not for the inexperienced and depending on the type of trading privileges you have, it may be disallowed so the order(s) won't go through that results in a naked short call position.
If you're bullish and the stock isn't prone to extreme moves in very short time spans, I'd get your orders and limit prices lined up, buy in the lower strikes, sell higher strikes, and leave the underlying alone. And there's no rule that says you have to sell calls on the whole position; if you're very bullish just do a partial write.
Are you suggesting the use of margin here? (temporarily)
Quote from ferrycorsten:
Are you suggesting the use of margin here? (temporarily)
No, I am not suggesting going on margin (borrowing from your broker) for a brief time.
I was under the assumption that there was sufficient equity in the account - idle cash or "new" cash from an increase in the underlying - to fund the buyback of some or all of the original short calls.
In the suggestions I made you do not establish a naked short call position, which, by the way, requires a performance bond using your own money, and it's frequently referred to as margin, but it's different than margin you borrow from your broker. It can get confusing...
Reminder: If your positions are in a US qualified (retirement) account or if you're not approved for naked option sales, all of the naked scenarios are moot because they will be prohibited.
any reason you don't want to have your stock called away?