covered call profit and loss question

[1a2b3cppp]

Quote from spindr0:

Yes, you have the profit numbers right IF SSO is at 43 or higher at expiration. The problem is that you're getting hung up on the brokerage statement.

Right now you have a $570 gain on the stock and a $70 loss on the option. You're ahead by $500.

If SSO is 43 at expiration, you will get another $75 from the stock since you have agreed to sell it at 43. The option will be worthless and that current $69 paper loss will turn into a $58 gain Add em up. $500 + $75 + $70 +$59 = $704 which is what you got.


The short answer today is:

Forget the -$69. You're $500 ahead.


The short answer if assigned is

1) $646 gain from the stock

2) $58 gain from the call

3) Maximum gain $704

If the option expires when the stock is at $42, he will show a loss on the option but still a gain on the stock (since his average cost was $36.54).

In that case, will the paper loss on the option disappear and be replaced with his $58 premium?

So if the stock is $42, his profit will be $546 for the stock (which he still owns because it was not called away), and then $58 for the premium (despite the paper loss on the option), for a total of $604. Is this right?

see ASE1245's post here:

So it sounds like it can technically happen if the option holder wants to do it, but it isn't very likely.

I was just curious if maybe some guy who is long some options gets all excited when they get ITM and wants to cash them out rather than possibly having them go back OTM before expiration.

 

[spindr0]

Quote from 1a2b3cppp:

If the option expires when the stock is at $42, he will show a loss on the option but still a gain on the stock (since his average cost was $36.54).

In that case, will the paper loss on the option disappear and be replaced with his $58 premium?

So if the stock is $42, his profit will be $546 for the stock (which he still owns because it was not called away), and then $58 for the premium (despite the paper loss on the option), for a total of $604. Is this right?

If the stock is below the strike at expiration, the option expires worthless and the premium is retained. So the profit is stock gain plus premium.


So it sounds like it can technically happen if the option holder wants to do it, but it isn't very likely.

I was just curious if maybe some guy who is long some options gets all excited when they get ITM and wants to cash them out rather than possibly having them go back OTM before expiration.

There are a number of reasons for early exercise. The most common is that the option trades near parity (no TP remaining). If it trades below parity, it's most likely to be arbed.

 

[atticus]

4 pages for this? The OP was serious?

 

[atticus]

Quote from Took2Summit:

EDIT:

Another thing too, The premium you collect from options for 9 out of 10 brokerage firms, contrary to popular belief, does NOT put the money into your account like most people are led to believe that it does.

For instance if you sell a call at $1 most people believe their account is credited $100. This actually is not the case. Your account has a short position of ($100) which towards the life of the option moves closer to 0..unless it goes completely against you and you end up oweing money on it.

If your brokerage does actually credit your account for $100 I would be interested to know who you use.

Do NOT listen to ^this^ guy.

 

[Took2Summit]

Quote from atticus:

Do NOT listen to ^this^ guy.

Such a troll, care to say what I said incorrect instead of saying stupid useless shit?

 

[atticus]

Quote from Took2Summit:

Such a troll, care to say what I said incorrect instead of saying stupid useless shit?

What you stated is grossly inaccurate. All of it.

 

[Took2Summit]

Quote from atticus:

What you stated is grossly inaccurate.

Funny for you to stand there and tell me what I stated is grossly inaccurate, yet this is how my account is reflected every single time I sell a covered call. As I also said in my comment, if you know a brokerage firm that does it differently please let me know.

 

[atticus]

Quote from Took2Summit:

Funny for you to stand there and tell me what I stated is grossly inaccurate, yet this is how my account is reflected every single time I sell a covered call. As I also said in my comment, if you know a brokerage firm that does it differently please let me know.

I can't fix stupid. Figure it out, or don't.

 

[Took2Summit]

Quote from atticus:

I can't fix stupid. Figure it out, or don't.

All I stated was the moment I sell a covered call, my total account value does not increase by the premium, which is true. If you understood or read differently then I am sorry you are challenged.

 

[atticus]

Quote from Took2Summit:

All I stated was the moment I sell a covered call, my total account value does not increase by the premium, which is true. If you understood or read differently then I am sorry you are challenged.

Quote from Took2Summit:

Another thing too, The premium you collect from options for 9 out of 10 brokerage firms, contrary to popular belief, does NOT put the money into your account like most people are led to believe that it does.

For instance if you sell a call at $1 most people believe their account is credited $100.