Read Option Volatility and Pricing by Sheldon Natenberg. The mother of all options books. Selling covered calls is a great idea if you are planning to be long the stock. You won't get exercised unless the stock is $22.59 or greater, and you rode the stock up 6 or 7 bucks. One way to think of it is you are capping your gain if the stock makes an extended upward move, as at expiration there will be no time value and only intrinsic value left. I'm a fan of selling front month and next month options rather than options that expire in 5 months.
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Okay I wrote my first options.
- Thread starter noob_trad3r
- Start date
Quote from Bobby the Jew:
Read Option Volatility and Pricing by Sheldon Natenberg. The mother of all options books. Selling covered calls is a great idea if you are planning to be long the stock. You won't get exercised unless the stock is $22.59 or greater, and you rode the stock up 6 or 7 bucks. One way to think of it is you are capping your gain if the stock makes an extended upward move, as at expiration there will be no time value and only intrinsic value left. I'm a fan of selling front month and next month options rather than options that expire in 5 months.
Yup not bad at all.
I always thought buying front or next would be pretty iffy? I've seen some poor deals and some good deals out there. 5 isn't too bad if he's long-term.
Quote from Bobby the Jew:
You won't get exercised unless the stock is $22.59 or greater
Bobby,
I don't know where you get such an idea, but you are disgrace to the tribe.
When expiration arrives, he will get <i>assigned</i> (not exercised) if the stock is one penny above the strike price.
The price he collected when selling the call has NOTHING to do with the exercise decision. Nor will he be assigned prior to expiration just because the stock rises to 22.60 or any higher price
Mark
Quote from dagnyt:
Bobby,
I don't know where you get such an idea, but you are disgrace to the tribe.
When expiration arrives, he will get <i>assigned</i> (not exercised) if the stock is one penny above the strike price.
The price he collected when selling the call has NOTHING to do with the exercise decision. Nor will he be assigned prior to expiration just because the stock rises to 22.60 or any higher price
Mark
Small but important correction. Options do get exercised prior to expiration in America (not in europe, hense the name 'American style options') at times.
A good example is when an option is deep in the money and there is a dividend x date coming around the corner. Options get exercised a lot when that happens.
Another example is the Friday before expiration date (options expire on Saturday) you can face a real chance of getting exercised if the time value is zero (or even negative which can happen). Often it will be prudent to exercise on the Friday before expiration and then sell the stock on the open market (for calls and the opposite for puts). The value to this is that you don't have to carry the stock over the weekend and take the risk of an event before you can sell on Monday.
Best of trading to you guys.
Quote from Robert Weinstein:
Small but important correction.
Yes, American style options are subject to early exercise. I was suggesting that it does not happen often. But right you are, covered call writers of dividend-paying stocks do have to be concerned.
Often it will be prudent to exercise on the Friday before expiration and then sell the stock on the open market (for calls and the opposite for puts). The value to this is that you don't have to carry the stock over the weekend and take the risk of an event before you can sell on Monday
True, but just selling the option is simpler and saves on commissions because some brokers still charge a hefty fee for exercise/assignment.
But, if someone does as you say, the person who is eventually assigned that exercise notice is NOT assigned prior to expiration. All assignments are allocated after the market closes for the day, not at the time of exercise.
Mark