thanx maverickz.... yes i wrote calls in jan, feb and march before.
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Repairing covered call
- Thread starter dream_maker
- Start date
thanx maverickz.... yes i wrote calls in jan, feb and march before.
Depends on your sentiment. If you are bullish, just take loss on the current CC and sell another further out or let them call the stock away from you anytime between now and expiration. You can also sell a put and turn it into a short straddle if you think it'll range bound.
Remember everytime you write a covered call when you are not prepared to sell the stock at the strike is the same as writing a naked call.
Remember everytime you write a covered call when you are not prepared to sell the stock at the strike is the same as writing a naked call.
Quote from MTE:
The position goes against you then there's no magic wand that will "repair" it.
No, but there are actions one can take to salvage a position towards one's own goals vs. someone elses.
To the OP, if you intend to keep your underlying stock, then the easiest thing to do is repurchase your written calls. Then, to reduce your losses on that, immediately sell more calls at a higher-strike - one that you're comfortable with.
If you bought the underlying specifically for the covered-call strategy, then - no problem - wait to see if your written call is exercised and if it is, your stock will cover it - your broker will liquidate your stock at the strike price and your account will be credited accordingly. Then you can use the proceeds to start over, if you wish.
There's a chance that it won't be exercised (but never assume it won't be), in which case, you'll get to have your cake and eat it too.
As another poster noted, you can only sell one contract of 'covered' calls at a time, per 100 shares of the underlying (for US options). You may be in deep trouble if you've written multiple contracts on the same shares at the same time. Definitely check with your broker if you're not sure.
If you felt that the stock was going higher, you could cover the short Apr call for a loss. But given that you haven't called the moves right (buy at 25, sell CC's on the way down, lock in at 17.50 and stock now 24), I wouldn't try to chase an opportunity loss.
If you're anywhere near break even from having written calls for 4 consecutive months, let the stock be taken. I do not think is a good idea to take realized losses by covering the written call and holding paper gains. And in this situation, you have no gains so it makes even less sense.
If you are going to write CC's, live with the decision when the stock rises. Adding more layers is often a recipe for further disaster.
If you're anywhere near break even from having written calls for 4 consecutive months, let the stock be taken. I do not think is a good idea to take realized losses by covering the written call and holding paper gains. And in this situation, you have no gains so it makes even less sense.
If you are going to write CC's, live with the decision when the stock rises. Adding more layers is often a recipe for further disaster.
I have been "caught" in that very same position before. Whenever I begin writing calls where the strike is lower than my original buying price, ill try to go out farther out in time so that the premium collected makes it worthwhile if the stock is called away.
About your situation ... consider this a learning experience and a second chance. You've learned a lot about the way a covered call works as a technique. Also, you get a chance to buy another, better stock.
Citi stinks as a covered call candidate because the bottom could drop out any day. If you want to continue to trade covered calls ... find a better stock.
About your situation ... consider this a learning experience and a second chance. You've learned a lot about the way a covered call works as a technique. Also, you get a chance to buy another, better stock.
Citi stinks as a covered call candidate because the bottom could drop out any day. If you want to continue to trade covered calls ... find a better stock.
Since you are getting into the Options Arena, and if you like covered calls might I suggest trading spreads instead?
Here is a very basic spread that has pretty much the same upside as your covered call with a limited downside (unlike your covered call.
Instead of buying the stock at $25/share ($2500 out of pocket on 100 shares) buy a 25 strike call for probably a few dollars per share (ex: $250 if the contract was at 2.50). Now you write your covered calls against this Call instead of the stock say at 27.5. If the stock runs against you (even down to $1) and both options expire worthless you only lose the difference between the premium you paid for the 25 strike and what you took in for the 27.5 strike. If the stock moves up and you get exercised you make the difference in strikes plus what you sold the 27.5 strike for minus what you bought the 25 strike for.
The net is you spent about 1/10th the money, limited your risk, and had almost the same profit potential you had with your covered calls. Be careful though since you were able to enter this trade much cheaper does NOT mean you should trade more contracts until you have mastered this type of trade.
There are a lot more advanced trades (including a reverse version of this one for when you are bearish) but play with this one for now and learn more later.
Here is a very basic spread that has pretty much the same upside as your covered call with a limited downside (unlike your covered call.
Instead of buying the stock at $25/share ($2500 out of pocket on 100 shares) buy a 25 strike call for probably a few dollars per share (ex: $250 if the contract was at 2.50). Now you write your covered calls against this Call instead of the stock say at 27.5. If the stock runs against you (even down to $1) and both options expire worthless you only lose the difference between the premium you paid for the 25 strike and what you took in for the 27.5 strike. If the stock moves up and you get exercised you make the difference in strikes plus what you sold the 27.5 strike for minus what you bought the 25 strike for.
The net is you spent about 1/10th the money, limited your risk, and had almost the same profit potential you had with your covered calls. Be careful though since you were able to enter this trade much cheaper does NOT mean you should trade more contracts until you have mastered this type of trade.
There are a lot more advanced trades (including a reverse version of this one for when you are bearish) but play with this one for now and learn more later.
thank you everyone for your replies.... that has really been helpful
Here are some more choices for you dreammaker:
1. buy a lower strike put and turn your position into a synthetic bull call spread (long the stock, short the call and long the put equals long call, short call equals bull call spread)
2. buy a higher strike put and turn your position into a bear call spread
3. buy the same number of calls, different strike and make a bull/bear call spread and stay long the underlying.
Your choice depends on your view of what underlying will do.
4. or just close the position
5. wait for assignment and your broker will close your position for you.
6. you are synthetically short the put (long stock, short call) and can make any strategy you like using the existing position, e.g. sell another put (same strike as call) and at same time buy one higher and one lower strike put to make an around the money butterfly. This is fine if you think underlying will behave in a way to make butterfly work, i.e. stay range bound and expect iv come down (short vega, long theta). And so on, the variations are literally endless.
7. roll the short call up or out or up and out.
However the most important point in this post is:
what was your management plan when you placed the trade?
What was your plan if stock went up, what if it went down, what if it went sideways?
What was your max loss point - the point at which you would have closed the trade?
Cheers
db
1. buy a lower strike put and turn your position into a synthetic bull call spread (long the stock, short the call and long the put equals long call, short call equals bull call spread)
2. buy a higher strike put and turn your position into a bear call spread
3. buy the same number of calls, different strike and make a bull/bear call spread and stay long the underlying.
Your choice depends on your view of what underlying will do.
4. or just close the position
5. wait for assignment and your broker will close your position for you.
6. you are synthetically short the put (long stock, short call) and can make any strategy you like using the existing position, e.g. sell another put (same strike as call) and at same time buy one higher and one lower strike put to make an around the money butterfly. This is fine if you think underlying will behave in a way to make butterfly work, i.e. stay range bound and expect iv come down (short vega, long theta). And so on, the variations are literally endless.
7. roll the short call up or out or up and out.
However the most important point in this post is:
what was your management plan when you placed the trade?
What was your plan if stock went up, what if it went down, what if it went sideways?
What was your max loss point - the point at which you would have closed the trade?
Cheers
db
Though this doesn't pertain to the OP's repair question, I think that a viable strategy for an informed option writer seeking income is to slightly overwrite calls against long stock, particularly when writing OTM, seeking return. An extra short call on say 500 shares will provide a bit more yield as well as add'l downside.
In the unlikely event that the underlying pops quickly, there will be a decent amount of cap. gain on the stock before the naked call even begins to be a problem... which will be above the short strike.
Obviously, the desire for more income and more downside protection has to outweigh the choice of putting more drag on the upside.
In the unlikely event that the underlying pops quickly, there will be a decent amount of cap. gain on the stock before the naked call even begins to be a problem... which will be above the short strike.
Obviously, the desire for more income and more downside protection has to outweigh the choice of putting more drag on the upside.
Quote from daddy'sboy:
Here are some more choices for you dreammaker:
1. buy a lower strike put and turn your position into a synthetic bull call spread (long the stock, short the call and long the put equals long call, short call equals bull call spread)
2. buy a higher strike put and turn your position into a bear call spread
3. buy the same number of calls, different strike and make a bull/bear call spread and stay long the underlying.
Your choice depends on your view of what underlying will do.
4. or just close the position
5. wait for assignment and your broker will close your position for you.
6. you are synthetically short the put (long stock, short call) and can make any strategy you like using the existing position, e.g. sell another put (same strike as call) and at same time buy one higher and one lower strike put to make an around the money butterfly. This is fine if you think underlying will behave in a way to make butterfly work, i.e. stay range bound and expect iv come down (short vega, long theta). And so on, the variations are literally endless.
7. roll the short call up or out or up and out.
However the most important point in this post is:
what was your management plan when you placed the trade?
What was your plan if stock went up, what if it went down, what if it went sideways?
What was your max loss point - the point at which you would have closed the trade?
Cheers
db
Welcome back daddy'sboy. Good to see that you have come to your senses and realized that boycotting EliteTrader serves no purpose.
http://www.elitetrader.com/vb/showthread.php?s=&postid=1715464#post1715464