Repairing covered call

dream_maker · Apr 7, 2008

hi,
one question on cc repair here. assuming i bought 100 shares of Citigroup at $25 and wrote some calls on it. the stock came down i continued to write calls on it.

the current call i wrote was strike price $18 when the stock was trading at say $19. however, the stock advances quickly and is now at $24.

does anyone have any idea on how i should go about repairing this stock?

thanx in advance.

dream maker

jwcapital · Apr 7, 2008

Quote from dream_maker:

hi,
one question on cc repair here. assuming i bought 100 shares of Citigroup at $25 and wrote some calls on it. the stock came down i continued to write calls on it.

the current call i wrote was strike price $18 when the stock was trading at say $19. however, the stock advances quickly and is now at $24.

does anyone have any idea on how i should go about repairing this stock?

When I did covered calls, and the stock dropped, I would close out the original calls and write new calls just ITM. The problem is if the stock continues to plummet--you still lose more on the stock than the calls can compensate for. For stocks that go up, you can actually see the stock outpace the call value..so sometimes it is better to close out the short call and let the stock ride.

thanx in advance.

dream maker

StockApprentice · Apr 7, 2008

Quote from dream_maker:

hi,
one question on cc repair here. assuming i bought 100 shares of Citigroup at $25 and wrote some calls on it. the stock came down i continued to write calls on it.

the current call i wrote was strike price $18 when the stock was trading at say $19. however, the stock advances quickly and is now at $24.

does anyone have any idea on how i should go about repairing this stock?

thanx in advance.

dream maker

First off, if you only bought 100 shares of C then you would only be able to sell 1 call once that's 'covered'. Any subsequent sells would be outright option call shorting... which has different margin requirements.

You sold calls without a hedge = loss unless you made enough on the premiums. What you do now depends on your risk parameters and expected stock behavior.

Maverickz · Apr 7, 2008

I guess I need some clarification. When you say you wrote multiple calls on Citi are you meaning that you have had Citi for a while and wrote like a Jan call, then a Feb call, then a Mar, and now you only have 1 open April 17.50 Call?

NOTE: I am assuming you meant that you wrote the 17.50 call since there are no 18 calls.

If this is the case then the simplest choices are either buy back the call or let it get exercised and lose the stock.

MTE · Apr 7, 2008

Quote from dream_maker:

hi,
one question on cc repair here. assuming i bought 100 shares of Citigroup at $25 and wrote some calls on it. the stock came down i continued to write calls on it.

the current call i wrote was strike price $18 when the stock was trading at say $19. however, the stock advances quickly and is now at $24.

does anyone have any idea on how i should go about repairing this stock?

thanx in advance.

dream maker

The position goes against you then there's no magic wand that will "repair" it.

nazzdack · Apr 7, 2008

Don't be an atheist nor agnostic anymore. Commit to religion as a first step towards repair and rebirth.

oraclewizard77 · Apr 7, 2008

Your broker will repair it for you automatically. Its called a margin call.

Quote from dream_maker:

hi,
one question on cc repair here. assuming i bought 100 shares of Citigroup at $25 and wrote some calls on it. the stock came down i continued to write calls on it.

the current call i wrote was strike price $18 when the stock was trading at say $19. however, the stock advances quickly and is now at $24.

does anyone have any idea on how i should go about repairing this stock?

thanx in advance.

dream maker

forex-forex · Apr 8, 2008

Quote from oraclewizard77:

Your broker will repair it for you automatically. Its called a margin call.

There will be no margin call, the OP sold a CC on 100 shares. Worst case scenario is 100 shares called away at $18 for a credit of $1800.00 plus premium collected on the calls.

I would let this position ride to expiry and let the shares go. Lesson learned on this one is that CC's suck, you are stuck with the downside - as in this case - and your profit potential is limited.

Maverickz · Apr 8, 2008

Quote from forex-forex:

There will be no margin call, the OP sold a CC on 100 shares. Worst case scenario is 100 shares called away at $18 for a credit of $1800.00 plus premium collected on the calls.

I would let this position ride to expiry and let the shares go. Lesson learned on this one is that CC's suck, you are stuck with the downside - as in this case - and your profit potential is limited.

I think he meant to say: "Your broker will repair it for you automatically. Its called an exercise."

nazzdack · Apr 8, 2008

Quote from forex-forex:

Worst case scenario is 100 shares called away at $18 for a credit of $1800.00 plus premium collected on the calls.

The worst case scenario is the stock goes to zero.