Extreme Newbie - Short Call Question

L

ltrade2015

Say I have taken the following positions:
1 Long XYZ 155call @ $3
1 Short XYZ 165call @ $3

I understand that with the long position, I have theoretical unlimited profits and with the short I have unlimited losses to $0 price. It is also my understanding that the the long call can act as a hedge to limit the losses on my short call and the way I do that is to exercise my long call if the price falls below the short call strike.

My question is... what if someone else exercises their call right to make me sell the short call before I can buy it back myself. Would I have to just exercise my call anyway or is there a way to make sure that I get the first opportunity to exercise my call?

Feel free to call me an "id-jut" if none of this is making sense. I'm trying... I literally just started options a couple of weeks ago and I'm all in. No pun intended.

Thanks in advance.
LT
 
Your example of the buy and sell at the same price are not possible and makes it hard to respond. If the prices were 3.00 and 1.00, you would be buying the spread for 2.00 net. If your short call gets assigned, you will likely have a large margin requirement the next day and have to cover the stock. If you choose to liquidate the long call or exercise that, that might be up to your broker as you are in a margin call.

You should know that there is a circumstance where it was profitable to early exercise the 165 call, you should have done the same or exited the trade before that event, as your call had the same value from that early excise.

I'd say it is important to understand that risk, but should not be your focus at the beginning of your option education. Learn the basics 1st. I'd start with:

https://www.lightspeed.com/trading-education-center/
http://www.cboe.com/education/education-main

Bob
 
Robert is right unless you legged into your spread, e.g., bought the $155 when the underlying was lower, then shorted the $165 to collect the same premium after the underlying ran up in price. So you lucked into a no cost bull spread? In that situation the worst you could do is breakeven. There are three possibilities:

1. XYZ expires above $165, you sell your $150 for $10 more than the $165 being called so you pocket $10.

2. If XYZ is between $165 and $150, the short expires worthless and your profit will be XYZ - $150.

3. If XYZ is less than $150, you breakeven as both expire worthless.

A long option in that situation acts like a covered call, so it will be sufficient to cover you short position no matter what. My broker told me they would automatically carry out the transaction to cover the short by liquidating the long for me.
 
Without a good understanding of how options work you went all in? And I thought I was the only one foolish enough to do such.:banghead:

Looking back I was really foolish but was extremely lucky because of market condition at the time (2013). Had I jumped in any other time I would have lost my shirt.

If you are an expert, ignore this post for I would be speaking out of line. If not, IMHO, you should at least read a few more books on options before continuing.

Good luck.
 
first you would get short 165 XYZ position, if the market price is lower than 165, you short position end up with profit

or if the market price higher than 165, the short position covered by your 155 call

so it mostly depends on what the market price is, do some scenario analysis and you can figure it out.
 
Sorry IronChef. I wasn't clear. I'm only paper money now. My "all in" comment was in reference to my drive, enthusiasm, and hunger. But you are absolutely right, I have a lot to learn. Thanks for your insight!!!

ironchef said:
Without a good understanding of how options work you went all in? And I thought I was the only one foolish enough to do such.:banghead:

Looking back I was really foolish but was extremely lucky because of market condition at the time (2013). Had I jumped in any other time I would have lost my shirt.

If you are an expert, ignore this post for I would be speaking out of line. If not, IMHO, you should at least read a few more books on options before continuing.

Good luck.
More...
 
Ok thanks Bob! I'm aware of the premium spreads set by the market makers, but I didn't think it was relevant in my example. I have a lot to learn:(. Thank you for your help!!!

Robert Morse said:
Your example of the buy and sell at the same price are not possible and makes it hard to respond. If the prices were 3.00 and 1.00, you would be buying the spread for 2.00 net. If your short call gets assigned, you will likely have a large margin requirement the next day and have to cover the stock. If you choose to liquidate the long call or exercise that, that might be up to your broker as you are in a margin call.

You should know that there is a circumstance where it was profitable to early exercise the 165 call, you should have done the same or exited the trade before that event, as your call had the same value from that early excise.

I'd say it is important to understand that risk, but should not be your focus at the beginning of your option education. Learn the basics 1st. I'd start with:

https://www.lightspeed.com/trading-education-center/
http://www.cboe.com/education/education-main

Bob
More...
 
Ok thanks lx! Looks like I have some work to do!!!

lx008 said:
first you would get short 165 XYZ position, if the market price is lower than 165, you short position end up with profit

or if the market price higher than 165, the short position covered by your 155 call

so it mostly depends on what the market price is, do some scenario analysis and you can figure it out.
More...
 
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