Opts covered call question

T

traderwald

Hi guys,

I have a covered call question based on below scenario. Could you please let me know.

If we have

- a UL long at 1000
- a long put on UL at 1000
- UL goes to 940
- sell a covered call at 950 (call same close date as put)
- UL closes at 960

Then what would be the position on close date of the options ?

- Since both are ITM, both would get exercised per what I understand.
- We would have a short position on the UL - is that correct ?
- If so at what price would it be short at ? 1000 (put strike) or 950 (covered call strike)

Thank you
 
etrades said:
Hi guys,

I have a covered call question based on below scenario. Could you please let me know.

If we have

- a UL long at 1000
- a long put on UL at 1000
- UL goes to 940
- sell a covered call at 950 (call same close date as put)
- UL closes at 960

Then what would be the position on close date of the options ?

- Since both are ITM, both would get exercised per what I understand.
- We would have a short position on the UL - is that correct ?
- If so at what price would it be short at ? 1000 (put strike) or 950 (covered call strike)

Thank you
More...
Yes
Yes
Hmm... avoiding confusion from how you phrased that, 'it?' vs 'getting' to 'now,' I'll go with neither, you are short at 960.
 
You are assigned on your short ITM options,you exercisec your long ITM option..

You are choosing to not trade out of your position on expiry,so you will be assigned on your short call,and you will exercise your ITM put.You are correct,you will be short assuming you had 1 put,1 call for every 100 shares.

Keep in mind if you initially bought stock and put simultaneously,you lost money on that position.In addition,you sold a call in the hole,and lost money on that as well.

So,while you are now short at 960,you have incurred losses on the position,and in order to break even, the stock would have to trade lower to make up for the loss on your synthetic call and short call.Your breakeven is not 960..
 
When you say "a long" UL at 1000 I assume you mean long 100 shares.
If that's the case after expiration, you would be short 100 shares. Your short call would take away your long stock and your long put would give you the 100 short shares as both would expire in the money.

Your profit/loss or net cost of the short you are left with is dependent on the price of the put you bought and the call you sold.
 
taowave said:
You are assigned on your short ITM options,you exercisec your long ITM option..

You are choosing to not trade out of your position on expiry,so you will be assigned on your short call,and you will exercise your ITM put.You are correct,you will be short assuming you had 1 put,1 call for every 100 shares.

Keep in mind if you initially bought stock and put simultaneously,you lost money on that position.In addition,you sold a call in the hole,and lost money on that as well.

So,while you are now short at 960,you have incurred losses on the position,and in order to break even, the stock would have to trade lower to make up for the loss on your synthetic call and short call.Your breakeven is not 960..
More...


Thank you all for the replies.

I want to understand how the short position on the UL shares is at 960 and not at either the strike price of the long put or the short call ?

Because the exercise or assignment is at the strike price of the short call or long put - correct ? So even if the UL is at 960, the new UL short position should be at one of the strike price ? I am bit confused on this. I do understand though the fact that the [(price of long put let us say 20*100 bux) ~ (price of short call let us say 15*100 bux)] would be P/L (i.e. -500 bux) for the opt positions.

Then the open position that I would have should be a short on the UL shares either at 1000 or 950 ? Please let me know.
 
etrades said:
Thank you all for the replies.

I want to understand how the short position on the UL shares is at 960 and not at either the strike price of the long put or the short call ?

Because the exercise or assignment is at the strike price of the short call or long put - correct ? So even if the UL is at 960, the new UL short position should be at one of the strike price ? I am bit confused on this. I do understand though the fact that the [(price of long put let us say 20*100 bux) ~ (price of short call let us say 15*100 bux)] would be P/L (i.e. -500 bux) for the opt positions.

Then the open position that I would have should be a short on the UL shares either at 1000 or 950 ? Please let me know.
More...
Everything will depend on what you paid for the options. So say you bought the stock at 1000 and the 1000 puts at $20, then sold the 950 call at $15 (your example above) and the stock closes at 960.

You would make $20 on your puts (you paid 20 and they are now worth 40)
You would make $5 on you short calls (you sold them for 15 and they are now worth 10)
You would lose $40 on your long stock (you paid 1000 and its now 960)
So you lost a net of $15 and your current position is short 100 shares, with the price currently at 960.
So you net "cost" of the short stock is 945.
This means if the stock went down to 945 you would break even (you currently being short 100 shares after expiration with the stock at 960)
If you covered the short stock now at 960, you would lose $15.
 
You have 3 positions:
Long 100 shares UL @ 1000
Short 1 Call @ 950
Long 1 Put @ 1000

If all are held to expiration: (UL @ 960)
"Long 100 shares" will be sold by "Short 1 Call"
"Long 1 Put" with a value of 40 (1000-960 = 40) will be sold .... $4,000.

***You would be short 100 shares (@ 960) if your broker auto-exercises the put rather than auto-sell.
 
Last edited:
etrades said:
Thank you all for the replies.

I want to understand how the short position on the UL shares is at 960 and not at either the strike price of the long put or the short call ?

Because the exercise or assignment is at the strike price of the short call or long put - correct ? So even if the UL is at 960, the new UL short position should be at one of the strike price ? I am bit confused on this. I do understand though the fact that the [(price of long put let us say 20*100 bux) ~ (price of short call let us say 15*100 bux)] would be P/L (i.e. -500 bux) for the opt positions.

Then the open position that I would have should be a short on the UL shares either at 1000 or 950 ? Please let me know.
More...

Assume you never touched the option, and had bought the underlying when it was trading 700 and it is 960 today. You'd may have gotten long @ 700 but it would be correct to say you are presently long at 960.

Same with the 950C. Assume you bought it. Exercising it is identical to buying the UL for 950. Like the example above, where you bought it is irrelevant, you are presently long @960.

a touch more complicated...

That call on exercise is gone, done, bye bye. It needs to be removed from your position which requires an offsetting transaction. Again assuming you were long it

You were at the moment of expry + 950C @10,
which to remove requires an offset of
-950c@10
and then your exercise
+UL@950
since the UL is trading 950 and the market is currently 960, the P+L on your UL is immediately +10 which offsets the loss of premium from the removal of the call from your account, and therefore no change in DR/CR.

No idea why something so easy sounds so complicated. This is why I used long calls. Shorts confuse people and speaking in puts cause people to have total brain farts. Hope that made sense.

Now my dog is looking at me funny, and from the avatar you can see that's not a good thing. Time for her walk.

Edit: Looks like 2 people jumped in while I was typing... Hopefully one of the three makes sense... good luck.
 
Thank you guys for the replies. I now understand this more clearly.

I want to understand why it is not as below though ( I am with IB btw)

1000 UL is at 960,
1000 put is 40 bux
950 call is sold at 15 bux

now,

when the UL goes to 960, why not:

1. exercise the call at 950 to sell the UL at 950 = +15 - 50 = -35

2. Exercise the put to short the UL at 1000 = -20 (put premium)

with Total = -55 + 100 shares of UL short at 1000.

Effectively it same as what you described above as being short at 960 with profit below 945.

However would being short at 1000 be better in any way ? Like you could sell a put DITM at 1000 for the UL and make more premium perhaps covering the -15 from above first trade and possibly buy a call at 955 so it has better balance at this level.
 
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