covered call profit and loss question

my advice to the op, i would not place any trade that i do not understand. i know i've started with the favorite of seminar sellers also, covered calls. and please do not believe all that you heard or read on a forum or any place on the internet. here is a little honesty for you to think about.

the way these trades are taught is disingenuous. they will say there is no risk in selling calls against your stock but the only little thingy they are leaving out is that you need to purchase stock. and as you are aware, stocks go up and down. so then, where do you think you will be left when your stock starts to drop, and not even that much? your winning stocks will be assigned and you will be left with a basket of losing stocks over time and you will have a negative return or you will get destroyed in a bear market. repeat, you will lose big time.

also, you might also hear that there may be a loss on your stocks but you haven't sold them yet so its not really a loss yet. i hope you don't fall for that one. you'll just sell calls against your losing stocks forever and ever, right? you will be in many positions where you own a stock at 50 and sell a 52.5, next thing you know your stock is at 45, so next month sell the 47.5 call, but then your stock rocketed up to 55. where does that leave you? you'll have to do some research and just think about these things.

and that is the truth about selling covered calls. no matter what you hear or read about or talk about at the office about how great this trade is just remember this post. you will lose. this is the same trade as selling puts. and in selling puts there is risk all the way down to 0, but then you still get to keep that premium from the sale of the call, yipee. take a look at the risk graph.
 
I'm already profitable in the trade. My position was already up around 10-15 percent when I sold the call. I know you have to purchase stock: I did a few weeks before I sold the call. That's why it was a covered call rather than a call.

I know it's not an infinite free money strategy like the seminar sellers tell you it is.

Since I was going to sell my stock at the strike price anyway, I figured why not get paid a little extra (premium) and sell it there anyway.

Apparently that's not how it works.
 
Quote from IronFist:

So none of those PnL numbers matter if I'm not going to close the option position? It's just weird. This was my first time actually selling an option and all the stuff I'd read said the premium is yours to keep regardless, not "you get the premium but then your account value goes down if the stock price rises."

So say I got a $50 premium. Then say price rises to just under the strike price and the option has gone up by $0.6. It's gonna show my option position as $-10 despite the fact that my account is actually +$50.

Right now my account is showing a loss on the option and it is subtracting that from my positive stock positions. I understand why it's doing that, but it seems like it's going to be wrong when expiry comes. Even if the stock goes up to a million I still have +$50, plus the gain on my stocks up to the strike price, and not a negative number subtracting from my $50 premium.

Edit - just read your edit. So I'm going to lose money? How can you lose money selling a covered call and having it move up past the strike price? Are you saying every options book and website is wrong? Now I'm worried I'm going to owe money on something that should be giving me money (and closing out a profitable position if assigned).
More...
You're a bit confused. Let's see if I can make it worse :)

You buy a stock and sell a covered call. The stock rises and so does the call, albeit at a slower pace. So for example, the stock has risen 2 points while the call has risen 75 cts. The stock is a long position and the call is a short position so the stock is up $200 and the call is down $75. Your account is up $125. If you look at the call in isolation, it has gained 75 cts ($75) but since it's a short position, you're down $75. The two numbers are just a reflection of what would happen if you closed the one or both legs today, eg. mark-to-market.

Clear as mud?
 
OP, pat yourself on the back for for doing at least two things correctly. First you did a real trade, which teaches you a lot more than any amount of paper trading ever will.

Secondly, you knew that you didn't completely understand the risk/reward scenario and you traded in very small size. You will get the same education paying one lot tuition as you will paying 10 lot tuition. Good luck.
 
Quote from spindr0:

You're a bit confused. Let's see if I can make it worse :)

You buy a stock and sell a covered call. The stock rises and so does the call, albeit at a slower pace. So for example, the stock has risen 2 points while the call has risen 75 cts. The stock is a long position and the call is a short position so the stock is up $200 and the call is down $75. Your account is up $125. If you look at the call in isolation, it has gained 75 cts ($75) but since it's a short position, you're down $75. The two numbers are just a reflection of what would happen if you closed the one or both legs today, eg. mark-to-market.

Clear as mud?
More...

I understand that. What I don't understand is how I'm going to lose money when the stock closes above the strike price on expiry day.

If the stock closes above strike on expiry, my shares get called away and I get paid the strike price value. This is fine, as it will be like a 20% gain. Like I said, I was going to sell them there anyway.

So if that happens, shouldn't my total for the trade be stock gains (using strike price as the selling price) + call premium?

Seems like I should have just not sold the call and sold my stock at the strike price and I would have made more money that way, which to me seems like it defeats the purpose of covered calls in the first place.
 
Quote from IronFist:

I understand that. What I don't understand is how I'm going to lose money when the stock closes above the strike price on expiry day.

If the stock closes above strike on expiry, my shares get called away and I get paid the strike price value. This is fine, as it will be like a 20% gain. Like I said, I was going to sell them there anyway.

So if that happens, shouldn't my total for the trade be stock gains (using strike price as the selling price) + call premium?

Seems like I should have just not sold the call and sold my stock at the strike price and I would have made more money that way, which to me seems like it defeats the purpose of covered calls in the first place.
More...

yes, ofcourse, you will have made money if your stock closes about the strike price of the call at expiration. but like i said, your winning stocks will be assigned and your losing stocks will begin to collect over time and drain your account.
 
Quote from daveyc:

yes, ofcourse, you will have made money if your stock closes about the strike price of the call at expiration. but like i said, your winning stocks will be assigned and your losing stocks will begin to collect over time and drain your account.
More...

What losing stocks? I'm talking only about the one position for which I sold a covered call.
 
Here i'll just post the position info:

I have 100 shares of SSO with an average cost of $36.54.

My target profit is $43.

The other day I sold an Oct 43 call for $58.74 after commissions.

The thought was if it goes up to $43 I would sell it for $646, but why not get a little extra in the form of an option premium?

So I thought that now, if it closes at $43 or higher, I should get $704 (minus whatever commissions).

Is that incorrect?

Right now, at $42.25, my gain/loss report says:

SSO: +$570
Call: -$69.26

Ok, please help me understand what I am missing.
 
Quote from IronFist:

What losing stocks? I'm talking only about the one position for which I sold a covered call.
More...

i can't help myself but ask you this. you have over 1500 posts and have yet to grasp a very simple trade and are asking complete newbie questions? and you are given several replies to answer your original post including my own which go further in helping you understand this trade and where it will take your account. your reply is 'what losing stocks'? serious? you don't see yourself in such a trade?
 
You must log in or register to reply here.
Back
Top