covered call credit spread? GE

[JJacksET4]

Quote from prc117f:

Thanks for your insight guys.

C. GE discovers the Flux capacitor and announces it, Stock flys to 28 dollars a share. I sell the call long and collect, and my shares get assigned as well obviously.

I like this one - if they discover that, I want first dibs on it to go back to 1955 and buy some GE stock and baseball cards (1954 Topps Wax Boxes!) and then sell in 2006 lol.

Quote from prc117f:

IRS should not consider that a washsale I would imagine since it is not a like security and I am taking additional risk. [/B]

Not quite sure I understand - if you sell your GE shares as a covered call being exercied and then buy GE back, that would be a wash sale IMO (I am no expert in taxes). Of course, you could wait 90 days or whatever.

I also just wanted to mention - this just shows why trading is so tough - on a given stock XYZ you could think it COULD go up, but since not sure, nice to hedge downside, but then not give up too much upside, etc, etc.

I think your idea seems OK if you are comfortable with it - obviously if GE is going to 0 or 1 or 2 or whatever you would be better off selling now and buying back later or never buying back.'

Another idea you could consider is simply this - sell the 2400 shares now - buy calls to hedge for any upside, but then if GE sinks to say $5, you would have saved yourself $3.50 or so more per share of a loss - your calls would expire, but now you could buy GE back at $5, etc.

And if it broke to the upside, you would now have calls. You could consider something like 24 9 strikes or even something like 12 9 strikes + 20 10 strikes or whatever - you would then actually control more shares then you do now in a big upmove. Obviously, the downside here is if GE stays around $8.5, your calls expire and if you want GE again, you have to buy back around $8.5. Personally, I doubt GE stays $8-$9 for too long - I really don't know too much about it, but I would not be surprised if it sees $5 or $12 within 3 months.

JJacksET4

 

[prc117f]

Oh what I meant was selling puts if I got assigned.

But this market is definitely rocky it almost seems like it wants to give up all the gains since 94 in general. So many people with 401Ks getting hit hard etc..

But I will be looking at that option as well lots of decisions

 

[JJacksET4]

Quote from prc117f:


Anyhow What I wanted to do is basically a covered call but not cap a potential upside potential. (ie GE reports better than expected earnings etc..

C. GE discovers the Flux capacitor and announces it, Stock flys to 28 dollars a share. I sell the call long and collect, and my shares get assigned as well obviously.

One more thing prc117f - you could certainly consider just selling less qty covered calls (i.e. 12). That way, you get some money in (and you can just keep it in your account, or you could buy more GE shares with it, etc.), and if GE explodes to the upside, you would still participate with 1200 shares. Quite honestly, I think this would at least be a lot simpler then the 8/9 spread idea. GE could still go way down, but you have stated that you understand that risk.

A person could even consider a partial collar or something like that in this case, but you don't seem so concerned with hedging on the downside if I understand you correctly - you just want to bring in some money while waiting and possibly buy more GE shares with the money you bring in.

JJacksET4

 

[spindr0]

Anyhow What I wanted to do is basically a covered call but not cap a potential upside potential. (ie GE reports better than expected earnings etc..

Your position achieves that.

You have your no mans land between 8 and 9. Stock ends up around 8.45, I get assigned as per a regular covered call. I take a realized loss selling at 8.

Assignment b/t 8 and 9 means that you're giving back some of the premium received. Below $7.97 or so is where add'l loss accrues.

Buying the shares back within 30 days as well as buying calls to replace the assigned stock is a wash sale violation. This would not create a tax problem if your position was closed by the end of the year. Year end carry over creates the tax issue.

No, there is no name for what you have done. There is something call a credit call spread where you buy calls at a lower strike and sell twice as many calls at a higher strike so that you can break even at a lower price than the purchase price but you're so far under water that it's not viable at this point unless you tinker with September or later.

Now if I was assigned can I write an ATM put on GE and a OTM call 1 point out as well

If assigned, you can do whatever you want, within the limitations of your option level approval. Selling an ATM naked put would be equivalent to a covered call and you would not participate in your aforementioned upside potential. That would be for a neutral to mildly bullish outlook. No discovery of flux capacitors allowed (g).

I'm not sure what you mean by "and a OTM call". Writing it would mean creating a vertical spread out of your long calls and that's a different story.

 

[spindr0]

Quote from prc117f:

But this market is definitely rocky it almost seems like it wants to give up all the gains since 94 in general. So many people with 401Ks getting hit hard etc..

I think a lot of people now have 201 K plans

 

[spindr0]

Quote from JJacksET4:

You could certainly consider just selling less qty covered calls (i.e. 12). That way, you get some money in (and you can just keep it in your account, or you could buy more GE shares with it, etc.), and if GE explodes to the upside, you would still participate with 1200 shares. Quite honestly, I think this would at least be a lot simpler then the 8/9 spread idea. GE could still go way down, but you have stated that you understand that risk.

Jjacks is on to the riight idea and what adjustment you choose would depend on your time frame and outlook.

I don't know if you're willing to go out that far but a Sep 10/12 covered call spread (long 24 10's, short 48 12's) would bring in about $750 net premium and would get you out a Sep exp of 12 or higher with l14-1/4 or so... with no add'l upside participation. If you were willing to play for no premium as your original post, you could do a size of +24/-40 which would give you a net of 8 long calls and you would break even in the 13-1/2 area and you'd participate to the tune of 8 long calls if it went higher. The drawback is that this provides no downside protection. It's a bullish bet.

Since time is your friend when setting up CCS's (but the enemy of the stock), a Jan 10/12.5 would look even better. It gives you a tad more net premium (more downside protection) and a breakeven point in the mid 13's. And if done on a +24/-40 ratio, similar participation as the Sep CCS.

Quite honestly, I'd look to do something that brings in more premium and cedes some of the upside. At this point, a loss of a couple of points would be a win since you'd have recovered 4-5 pts. It's not a happy ending but holding on to the upside hope at the risk of total loss on the downside would be nowhere near my first choice.

Hope this makes sense. I know it's a bit more complex... but YOU started it!

 

[dagnyt]

Quote from prc117f:

Stock could end up at 9.08 but I made sure to instruct the OCC/Broker not to auto assign an ITM I let the call expire without taking stock (not worth paying commission to close) Stock gets assigned away obviously as per standard covered call situation.

I've stayed out of this discussion so far, but this statement above tells me you don't really understand what you are doing.

If you don't want to exercise, that's fine. Buy why would you allow the calls to expire worthless when you can sell them?

Mark

 

[Subdude]

Quote from spindr0:

It's clear from your response that you don't understand the OP's question or his position so I doubt that explaining it further would help you.

Actually, I did understand his question. He believes GE has the capacity of recovering up to and beyond his entry point long-term, but wants to generate income while it is in the doldrums, hence the whole spread/call writing game.

OK, I can't resist. Suppose he does nothing and the stock keeps sliding down. How does that "help his situation " if the stock "kept sliding down?" Umm, nothing helps a long directional position if the stock drops. That's kinda what happens when the market goes in the opposite direction that you bet on.

Therein lies the problem. Why not just get out of his long right NOW altogether, and pick up GE much cheaper later? The money saved by staying out of the declining market is as good as any income generated by option writing strategies.

Look at it this way. He owns 2400 shares of GE. Would his broker stop him from selling 24 Apr 8 calls against the stock, creating 24 covered calls? Of course not. Next, he buys 25 April 9 calls. Are you suggesting that his broker would stop him from doing that because it's now a spread and long stock not a covered call and long calls? I think not.

Let's say on April 17, GE closes @ 9.04. The entire spread gets assigned, and OP loses $0.48 per share, regardless of whether or not OP's also holding a long position in GE. The broker must require that he maintain the $0.48/share in cash to cover the spread initially, and will not allow to take this amount out of the account afterward. This, in effect, becomes his collateral required to write the spread. You can also think of this as the initial and maintenance margin requirement being equal. Not sure about others, but my broker (IB) does allow this type of position in a cash account, however both options must be European-style settled (regular U.S. stock options are clearly not).

Aside from all these technicalities, I do not understand why you also suggested that buying cheap long puts of GE is a bad idea in OP's situation. He really does NOT need them to go into the money to profit from the further slide in the stock price! Today, for instance, March 2.5 puts gained 150% of their value, rising from $0.02 to $0.05. If he had bought 50 contracts risking only $100, he could have made $150. Consider now that his 2400 shares brought in another $2K of unrealized loss today, and it's not hard to see that going long on puts is a much better "hedge" play than any type of credit spread in OP's situation.

 

[prc117f]

I did something a bit different today plans changed

Both are strike 7.50 options


I bought 24 contracts (puts) GEWOU for 67 cents
I wrote 24 contracts (calls) GEWCU 1.31

It has 19 days remaining. No earnings report till April so there is none of that in the way.

Not sure if there is a name for this type of trade? I figure better cover my ass



Maybe sprinkle 10 calls 10 dollars just in case tuesday if I can get them for 14 cents or less (140 bucks)

Option sandwitch?

 

[spindr0]

Quote from Subdude:

Therein lies the problem. Why not just get out of his long right NOW altogether, and pick up GE much cheaper later? The money saved by staying out of the declining market is as good as any income generated by option writing strategies.

LOL. If one had the foresight today to know that one could pick up GE at a lower price at a later date then one would never have losses in the first place. Or conversely, one would be short, taking advantage of the drop. But that's not how it works in the real world.

You get out of the way because you think that the underlying is going down or that you've reached your stop loss point. The problem is that the OP does not want to get out of the way. He wants to stay with the position and participate to the upside if GE recovers and has asked if his initial option stategy would achieve that.