Selling Covered Calls (TOTAL NEWBIE )

B

Booker_t79

Hello everyone

this is my first request and total newbie when it coming to selling covered calls . I start ed this with paper trading and not real money since FB put a nice 500 hole in my pocket two days ago with its earnings lol.

What i wanted to know is what will happen in this situation as i am trying to understand what the outcome will be.

I bought - JBLU - 100 shares for $19.73 + $4.95 commission = $1977.95

i sold 1 covered call for MAY 15 for 21 strike price for $.25 + $4.95 = $19.51 premium i possibly might get.

but now my options is showing -1 with a loss of like $12.50 and my stocks are up $18.50

so what will happen next and when will premium show up etc


if you guys can help and please be somewhat simple in help me understand i would really appreciate it .
 
Premium should already show up...if not, allow one day for option trade to settle. Premium will be added to your cash balance.
-1 represents that the option was sold, not bought.
As for why the option is showing a loss, it depends...did the underlying decrease? Did volatility decrease?
 
  • The problem with covered calls is that they cap the upside for peanuts and provided no protection to the downside.
  • JBLU earnings are this Tuesday, April 28. Before the bell.
  • Covered Calls + Earnings = No Win Situation

:)
 
Are you using a margin account or a cash account? If you are borrowing on margin, then your premium will be deducted from your net margin balance and not exactly show up as cash on hand. As Victor mentioned, your option position should show as a -1 since you sold it short, and most likely you are showing a small loss due to commissions, at least if that's how your broker reports current positions.
 
The loss is only theoretical. As long as the stock does not pass 21 on may 15 you will receive your premium then. Your 12.50 just means if you want to unwind your position (buy the call back it will cost you 0.375). The call most likely increased in value because of a IV increase.
 
If you are wanting to do the CC game, and you are halfway decent at picking stocks, a more interesting strategy to me is this one. It is equivalent to CCs, but to me it "flows" better than just banging out CCs month after month.

1. Sell Puts just OTM on a stock(s) that won't, hopefully, crash and burn. Short Puts have the same risk profile as CCs and at low leverage are of course no more risky than CCs.
2. If not assigned keep the prem and do it again, and again, and again...
3. If assigned sell Cov Calls OTM until the stock is called.
4. Sell Puts and do it all over again.

How well this works depends on the stock of course, and if the stock drops a bunch you may have a hard time getting back to even. But this strategy has the benefit of buying at a lower basis (if the stock drops and the Put is assigned), and selling after the stock goes up some (the Call is assigned). Plus you get to keep the premiums in any case to help if you pick the wrong stock.

And if you feel like it you can mix it up, for example you can sell a Put along with your Cov Call for double prem. If your addon Put is also assigned you at least keep both prems and then the effect is to "average in." But definitely don't over extend your account...

There are better strategies but if you want to see how this one works, keep track of stock and option prices for a few months in a spreadsheet and see if it meets your needs.

Good trading to all.
 
You must log in or register to reply here.
Back
Top