Covered Calls Questions

T

tomahawk

I was hoping any of you experienced call writers could share some of your experience in answering a couple questions I have.

What I'm wondering is, is there ever an instance when your strike is reached but the option is NOT exercised? I'm talking about CC's on very liquid stocks or ETFs such as GS, SPY, GLD, OIH, etc. Let's say the strike is breached for just 5 minutes but then price reverses and never looks back - how likely is it that the option WON'T be exercised?

I guess a question that goes along with this is how quickly is an option typically exercised once the strike is hit? (in liquid instruments such as the ones listed above). Does it depend on how close you are to expiration?

Basically I'm just trying to get a sense of the reliability of options being exercised once the strike is reached.

Thanks.
 
The general answer is that the option won't be exercised in most likelyhood if there is still any time value. This might not always be in the case in a dividend situation however.

Generally, if a stock is at $48 and you sell a $50 strike CC for $300 and now the stock goes up to $51 and the CC is still $300 (assume some time has drained), it won't be exercised because there is still $200 of time value. If the stock was at $51 and the CC was at $100 - now there is a likelyhood that it could be exercised.

That is the general idea - if there is time value remaining, the option normally won't be exercised, however of course that can't be absolutely guaranteed. So if you want to see if an option might be exercised, always check the time value.

JJacksET4
 
Mike and JJacks - thanks for your replies. The time value thing explains it clearly.

So if there is considerable time value left when the strike is hit, is there a general school of thought as to how to proceed? Do we ever want to take the gain right there and move on to the next trade?

Once again, thanks.
 
Quote from tomahawk:


So if there is considerable time value left when the strike is hit, is there a general school of thought as to how to proceed? Do we ever want to take the gain right there and move on to the next trade?
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Others might be able to give more detailed answers, but I think you would have to consider your feeling on the stock at that time. If you were still at least modestly bullish or neutral on the stock, you could certainly keep the positions open and let the time value drain out of the covered call.

If you have any reason that you are now bearish on the stock, it would probably then be a good idea to consider closing - as a covered call is really meant for neutral through somewhat bullish outlooks. If you are afraid the stock will decline, there is nothing wrong with pulling out profits.

JJacksET4
 
Quote from JJacksET4:

Others might be able to give more detailed answers, but I think you would have to consider your feeling on the stock at that time. If you were still at least modestly bullish or neutral on the stock, you could certainly keep the positions open and let the time value drain out of the covered call.

If you have any reason that you are now bearish on the stock, it would probably then be a good idea to consider closing - as a covered call is really meant for neutral through somewhat bullish outlooks. If you are afraid the stock will decline, there is nothing wrong with pulling out profits.

JJacksET4
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That answer was plenty detailed :) ... once again, much thanks.
 
IT would be dumb for someone to exercise and throw away time value.

IF you sell a call and it has 30 days of time value left selling it even if its ITM you threw away 30 days of time value.

IF the dividend is less than the remaining time value and the option is ITM you most likely will not get exercised since it is still throwing away money.

If someone wants the stock they can just buy it, makes no sense to go long a call option ITM and then exercise it if it has any remaining time value. (or time value greater than dividend)


Look at the delta of your option. as time passes and its ITM it gets closer to delta 1.0

if delta is 1.0 expect to get exercised.
 
Quote from KINGOFSHORTS:

IT would be dumb for someone to exercise and throw away time value.

IF you sell a call and it has 30 days of time value left selling it even if its ITM you threw away 30 days of time value.

IF the dividend is less than the remaining time value and the option is ITM you most likely will not get exercised since it is still throwing away money.

If someone wants the stock they can just buy it, makes no sense to go long a call option ITM and then exercise it if it has any remaining time value. (or time value greater than dividend)


Look at the delta of your option. as time passes and its ITM it gets closer to delta 1.0

if delta is 1.0 expect to get exercised.
More...

Thanks.
 
Quote from tomahawk:


What I'm wondering is, is there ever an instance when your strike is reached but the option is NOT exercised? ...

Basically I'm just trying to get a sense of the reliability of options being exercised once the strike is reached.

Thanks.
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Tomahawk,

I hope you don't mind, but I have a very serious favor to ask of you.

I reply to a good number of questions from options rookies, and the question you ask is the one I encounter most frequently. I'd like to understand why that is.

Thus, my questions:

I know you are asking the likelihood of being assigned an exercise notice. But - what makes you believe that that is going to happen?

Did you read that options are exercised when they move in the money?

Did you just make the assumption that option owners would exercise as soon as they move in the money?

Did you hear about this in a seminar?

Did you read something confusing on this topic?

Or - is there no specific reason you are asking. You are just gathering information.

As you learned from the replies given here, it's foolish to exercise any earlier than necessary (expiration), so I am wondering why you - and so many others - got the idea that this is something about which to be concerned.

Thanks you.

Mark
 
If the call has time premium remaining, it's very unlikely that you'll be assigned. And if you are, take the money and run much sooner than you should have :)
 
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