Covered Call Newbie Question

[torontoman]

Quote from Hester:

If you close the entire position before expiration, then you don't get to keep the premium. You have to buy back the call which will cost money. If hold the position through expiration and if spy is at 110.01 or above, your stock will get called away at 110 (thats the price you sell it at) and you get to keep premium. In this case do not worry about doing anything yourself, you do not have to close the position yourself, it happens automatically. If spy is below 110 through expiration you keep premium and your stock is not called away.

Great. Thanks!

 

[dagnyt]

Quote from torontoman:

OK. This may sound like a stupid question brought on by an idiot. But, here it goes.

If I write a covered call and I get assigned, do I keep the premium?

You are working too hard on this.

1) If you sell the call, the premium is yours to keep. It does not matter whether you are assigned an exercise notice or the option expires worthless.

2) The call option limits your gain. The maximum selling price for you is the strike price.

3) This strategy reduces the risk (slightly) of owning stock, and is very popular. It works well most of the time, but raging bear markets will cost and you may feel short-changed during raging bull markets.

Mark

 

[torontoman]

Quote from dagnyt:

You are working too hard on this.

1) If you sell the call, the premium is yours to keep. It does not matter whether you are assigned an exercise notice or the option expires worthless.

2) The call option limits your gain. The maximum selling price for you is the strike price.

3) This strategy reduces the risk (slightly) of owning stock, and is very popular. It works well most of the time, but raging bear markets will cost and you may feel short-changed during raging bull markets.

Mark

Thanks for the answer Mark. I actually have a collar on. I am unsure how to adjust it if I want to keep the long position. I have been studying, but I have not found a good adjustment yet. I might just let it be assigned. That's the safest if I don't know what to do....or cover the calls. But I've had a good run and I don't want greed to kill me.

 

[erol]

if you don't mind me asking, what broker are you with?

is it one of the Canadian ones?

if so, did you put in the order yourself through the web, or was it a broker-assisted contingent order?

 

[Madison]

Quote from MTE:

No, the premium goes into a special fund that Goldman Sachs and the like use to pay out bonuses.

Actually only a portion does, depending on your tax bracket.

 

[MTE]

Quote from Madison:

Actually only a portion does, depending on your tax bracket.

It was meant to be a joke, but, as you have pointed out, it's actually true. Well, unless you don't pay tax in the US.

 

[torontoman]

Quote from erol:

if you don't mind me asking, what broker are you with?

is it one of the Canadian ones?

if so, did you put in the order yourself through the web, or was it a broker-assisted contingent order?

Hi.

I put my orders with IB. I did it myself on the web. I legged into it.

 

[dagnyt]

Quote from torontoman:

Thanks for the answer Mark. I actually have a collar on. I am unsure how to adjust it if I want to keep the long position. I have been studying, but I have not found a good adjustment yet. I might just let it be assigned. That's the safest if I don't know what to do....or cover the calls. But I've had a good run and I don't want greed to kill me.

1) Being assigned is a reasonable result. Don't fear it.

2) If you prefer to continue to own the collar, you can roll. three steps, in this sequence:

a) Enter a spread order to buy back the call you sold and sell another that expires next month (or further out). Use a limit order, never a market order.

b) As soon as you are filled on that order, but a new, appropriate put.

c) Try to sell your current put, but there may be no bids if the 'run' has been large enough.

3) Another way to adjust is to spend some cash. I don't like spending that money, but the truth is that you don't truly own a collar any longer. Apparently your put option is very far OTM and you essentially own a covered call - with a protective put that's not offering much protection.

Thus, you can sell your put and buy another - probably in the same expiration (that minimizes cost). The sole purpose for doing this is to gain downside insurance. But it will cost cash out of pocket and many traders refuse to do this.

Mark

 

[spindr0]

Quote from torontoman:

I actually have a collar on. I am unsure how to adjust it if I want to keep the long position. I have been studying, but I have not found a good adjustment yet. I might just let it be assigned. That's the safest if I don't know what to do....or cover the calls. But I've had a good run and I don't want greed to kill me.

If the stock has risen above the collar's call strike and you want to keep it, I don't think it's a good idea to cover the calls for other than a modest debit (no problem with a credit). Otherwise, you end up taking realized losses and carrying paper gains and IMHO, that's not a good habit.

If you want to keep the stock, just roll the collar up and out a month. Yes, this will be for a debit but you'll be locking in a portion of the stock's appreciation (offsetting the debit) and you'll have potential for add'l gain.

 

[torontoman]

Thank you guys very much for these great inputs.