"so it turns out when selling covered calls and if you buy the shares the stock isn't subtracted from the buying power. The cash balance from the covered call gets added to your cash – increasing your buying power by the premium you took in."
A nice analogy:
"
Imagine you get a loan. There’s a cap on loaning 2x your cash. You use that to buy a shitty car.
You then go to a dealer and sell the car, but he’s not actually picking it up until the weekend. He gives you the cash now after the paperwork is signed.
You take that cash back to the bank, double it with another loan, and buy a 2x nicer car.
Rinse and repeat until you’re selling lambos.
The crazy part by the way, and robinhood’s fuckup, is that they are both the car dealer and the bank. They are letting him sell covered calls (a delayed sale of the car) on their own fucking platform and then giving him a loan against the proceeds of the sale. It’s like giving him a loan on a loan, which they absolutely cannot legally do.
Now, at any point the covered calls could be exercised — the dealer could come pick up the car early since it’s contractually his. Usually he won’t because the Black-Scholes model of pricing used cars says not to, but he can. And if he does you’re fucked (I think) because the bank will take a look at your new balance sheet and realize you owe them a car’s worth of money."
A nice analogy:
"
Imagine you get a loan. There’s a cap on loaning 2x your cash. You use that to buy a shitty car.
You then go to a dealer and sell the car, but he’s not actually picking it up until the weekend. He gives you the cash now after the paperwork is signed.
You take that cash back to the bank, double it with another loan, and buy a 2x nicer car.
Rinse and repeat until you’re selling lambos.
The crazy part by the way, and robinhood’s fuckup, is that they are both the car dealer and the bank. They are letting him sell covered calls (a delayed sale of the car) on their own fucking platform and then giving him a loan against the proceeds of the sale. It’s like giving him a loan on a loan, which they absolutely cannot legally do.
Now, at any point the covered calls could be exercised — the dealer could come pick up the car early since it’s contractually his. Usually he won’t because the Black-Scholes model of pricing used cars says not to, but he can. And if he does you’re fucked (I think) because the bank will take a look at your new balance sheet and realize you owe them a car’s worth of money."
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