Selling Covered Call Expiration

[wirvinggg]

Let's say you own 100 shares of Company A at $115/share. If you sell a covered call on the bid of $1.91 with a strike price @ $114, would the options contract expire immediately. If the expiration date is say 2 weeks out, since the stock price is already above the strike price would your 100 shares be called immediately before the expiration date?
(I'm using JPM as an example so these numbers are legit.)

 

[beerntrading]

Let's say you own 100 shares of Company A at $115/share. If you sell a covered call on the bid of $1.91 with a strike price @ $114, would the options contract expire immediately. If the expiration date is say 2 weeks out, since the stock price is already above the strike price would your 100 shares be called immediately before the expiration date?
(I'm using JPM as an example so these numbers are legit.)

No. It expires on Oct 19th (or 12th, if you're using the weekly). You might get early assigned, particularly yesterday due to the dividend, and your shares would be spirited away.

As far as entering that position, $1 above or below the price should give fairly identical exposure, but if you used the $116, while your payoff would be almost identical to the $114, you'll skirt some of the early assignment risk. But take that logic one step further, and the $115 being ATM probably best serves your needs unless you have a specific directional bias that you're trying to neutralize while maintaining long-term gains (absent that consideration, you should just exit the shares position and take on any delta exposure you want directly). There's lots of moving parts to that example (dividend and liquidity, for example).

And, fwiw, I'd take up the other side of your call writing if I had to take one side of the trade (as it stands, I'm holding Nov $120 calls).

 

[JSOP]

Let's say you own 100 shares of Company A at $115/share. If you sell a covered call on the bid of $1.91 with a strike price @ $114, would the options contract expire immediately. If the expiration date is say 2 weeks out, since the stock price is already above the strike price would your 100 shares be called immediately before the expiration date?
(I'm using JPM as an example so these numbers are legit.)

Ok if the expiration date is 2 weeks out, then the options contract would expire in 2 weeks, hence the term "expiration date". And whether your shares would be called away from you or not would depend on 2 things: where the price would be in 2 weeks on expiration date if you have what's called an European option but if you have an American option that means your shares can be called away from you anytime before the expiration date whenever somebody decides to exercise their call options whenever they see the strike price is less than the > the market price of the stock especially if there is a very large dividend to be paid that justifies the premium.

 

[wirvinggg]

Okay, that makes sense. So can you tell if it's a European of American option? Which type if more prevalent?

 

[wirvinggg]

No. It expires on Oct 19th (or 12th, if you're using the weekly). You might get early assigned, particularly yesterday due to the dividend, and your shares would be spirited away.

As far as entering that position, $1 above or below the price should give fairly identical exposure, but if you used the $116, while your payoff would be almost identical to the $114, you'll skirt some of the early assignment risk. But take that logic one step further, and the $115 being ATM probably best serves your needs unless you have a specific directional bias that you're trying to neutralize while maintaining long-term gains (absent that consideration, you should just exit the shares position and take on any delta exposure you want directly). There's lots of moving parts to that example (dividend and liquidity, for example).

And, fwiw, I'd take up the other side of your call writing if I had to take one side of the trade (as it stands, I'm holding Nov $120 calls).

What exactly is early assignment?

 

[beerntrading]

Okay, that makes sense. So can you tell if it's a European of American option? Which type if more prevalent?

JPM is American style exercise. Typically, in the US equities are done with American style. European style (or "cash settled") are what trades through most of the rest of the world and on index options (I'm unclear on futures, but I believe they are Euro style with a cash or physical delivery option).

What exactly is early assignment?

With American style, you can exercise your options at any point prior to expiration. European style can only be exercised on expiry. So, if you write a call and someone wants to take physical delivery of the shares before expiration, they can exercise...and thus you get assigned and the shares disappear from your account in exchange for cash in the amount of shares x strike.

 

[JSOP]

Okay, that makes sense. So can you tell if it's a European of American option? Which type if more prevalent?

You have to look at the specs of the options; it's usually published by the exchange that it trades on.

What exactly is early assignment?

Early assignment is when the option is exercised earlier than its expiration date and you, the option seller gets subsequently assigned, early.