Selling covered calls with regard to rebuy and cap gains

[macville]

Hello, I am learning about selling covered calls and have some questions about what happens if the buyer of a covered call executes the option. What I am confused about is, buying back the option if it's above the strike price. I've seen that you normally can buy it back, but is that after the stock is traded? I've seen it both ways in articles and near clarity.

I ask this question because I have stocks that I would like to sell covered calls with, but I don't want to necessarily sell it if the market does suddenly jump (looking at 1 SD/10%+ gain calls) due to some of the amounts of LT cap gains I have on the shares. I understand that I might have to buy back at a loss, but that would be far better than realizing some LT cap gains. Is buying back always an option?

Any info or pointing towards some articles that would explain the exact process would be great. The info I've found so far has been somewhat vague on what the actual process is.

Thanks,

Matthew

 

[JSOP]

Hello, I am learning about selling covered calls and have some questions about what happens if the buyer of a covered call executes the option. What I am confused about is, buying back the option if it's above the strike price. I've seen that you normally can buy it back, but is that after the stock is traded? I've seen it both ways in articles and near clarity.

I ask this question because I have stocks that I would like to sell covered calls with, but I don't want to necessarily sell it if the market does suddenly jump (looking at 1 SD/10%+ gain calls) due to some of the amounts of LT cap gains I have on the shares. I understand that I might have to buy back at a loss, but that would be far better than realizing some LT cap gains. Is buying back always an option?

Any info or pointing towards some articles that would explain the exact process would be great. The info I've found so far has been somewhat vague on what the actual process is.

Thanks,

Matthew

https://www.elitetrader.com/et/threads/selling-covered-call-expiration.325651/#post-4739480

https://www.fidelity.com/viewpoints/active-investor/how-to-sell-covered-calls

https://theoptionprophet.com/blog/how-to-make-money-with-covered-calls

https://www.investopedia.com/articles/optioninvestor/08/covered-call.asp

https://www.thebalance.com/philosophy-behind-writing-covered-calls-2536591

https://www.optionsplaybook.com/option-strategies/covered-call/

Enjoy your reading and Merry Xmas!!

 

[macville]

Enjoy your reading and Merry Xmas!!

Thank you for those links, but unfortunately, they did not answer my question

So I found this page ( https://www.schwab.com/active-trader/insights/content/managing-covered-calls which talks about "Close-out: Buy back the covered calls (at a gain or loss) and retain your stock." So they use the term "buy back" and "retain", but I don't think terms are accurate to what I think actually happens and that's what I need clarity on.

So when it says buy back, you aren't actually buying back your option as the person you sold it to isn't selling it back to you. Correct me if I am wrong here, when you "buy back" you are buying an new (to you at least) option for the same strike date and strike price as the option you sold. You don't actually "retain" your stock but you swap it out for new shares from someone else. When that happens, if you have LT cap gains like I do, you would end up realizing those gains. Is that what happens? Or when you buy the call for the same as your sell call, those new shares you got with the buy call go in and then go out to your sell call? (which is what I would really like to have happen!) I wasn't sure if a last in/first out setting on my stock would allow it to do that or not.

Any insight on this would be very helpful.

Thanks,

Matthew

 

[thefuturestrader]

If I am understanding the question correctly, you are actually buying back the option that you sold. You can't be both long and short an option at the same strike price with the same expiration. The OCC is a middleman and is the party you are selling and buying the option from and to. http://www.cboe.com/education/getting-started/quick-facts/options-marketplace

In your example, you would buy back the sold option. You would still have the same underlying shares. Any tax consequences would depend on the nature of the option sold and whether there was a gain or loss. Thanks.

 

[JSOP]

Thank you for those links, but unfortunately, they did not answer my question

So I found this page ( https://www.schwab.com/active-trader/insights/content/managing-covered-calls which talks about "Close-out: Buy back the covered calls (at a gain or loss) and retain your stock." So they use the term "buy back" and "retain", but I don't think terms are accurate to what I think actually happens and that's what I need clarity on.

So when it says buy back, you aren't actually buying back your option as the person you sold it to isn't selling it back to you. Correct me if I am wrong here, when you "buy back" you are buying an new (to you at least) option for the same strike date and strike price as the option you sold. You don't actually "retain" your stock but you swap it out for new shares from someone else. When that happens, if you have LT cap gains like I do, you would end up realizing those gains. Is that what happens? Or when you buy the call for the same as your sell call, those new shares you got with the buy call go in and then go out to your sell call? (which is what I would really like to have happen!) I wasn't sure if a last in/first out setting on my stock would allow it to do that or not.

Any insight on this would be very helpful.

Thanks,

Matthew

You need to learn the basic of what option is. What does "buy back" and "retain your stock" means is the very basic of what option trading is. All those links that I found and what you found are all too advanced for you at this point.

Here is where you need to start: https://en.wikipedia.org/wiki/Option_(finance)

 

[ironchef]

Hello, I am learning about selling covered calls and have some questions about what happens if the buyer of a covered call executes the option. What I am confused about is, buying back the option if it's above the strike price. I've seen that you normally can buy it back, but is that after the stock is traded? I've seen it both ways in articles and near clarity.

I ask this question because I have stocks that I would like to sell covered calls with, but I don't want to necessarily sell it if the market does suddenly jump (looking at 1 SD/10%+ gain calls) due to some of the amounts of LT cap gains I have on the shares. I understand that I might have to buy back at a loss, but that would be far better than realizing some LT cap gains. Is buying back always an option?

Any info or pointing towards some articles that would explain the exact process would be great. The info I've found so far has been somewhat vague on what the actual process is.

Thanks,

Matthew

You reminded me of me back in 2013 when I started trading with covered calls on stocks I owned. Here is one of the free websites on option education:

https://www.optionseducation.org/?p...VRBh9Ch0_QQFjEAAYASAAEgKTgPD_BwE&gclsrc=aw.ds

An important distinction about two different strategies trading covered calls:

1. Your trade is a combination of buying the underlying and selling a call simultaneously.

2. You own some stocks and sell calls to "generate" premium. You have no intention of selling your stocks. Many websites claimed this as "free" money/income.

If you are serious about selling covered calls, #1 is the correct way to look at the trade and you usually analyze the pair and find one with the highest expectancy to trade. There are many screeners from brokerages that screen candidates.

#2 is unfortunately where most of us newbies go. Namely wrongly think that we can generate free income from owning the stocks and writing covered calls. If your intention is to always buy the stocks back, it is equivalent to selling naked calls.

On average, if you sell calls regularly, you will usually not net extra profits compare to buy and hold. How do I know? I mechanically traded hundreds of covered calls (most of them OTM) on stocks I owned in 2013 and netted a loss (compare to buy and hold). To add insult to injury, because some of the stocks were called away, I ended up had to buy them back and paid capital gains.

Hope the website help you with the definitions and the processes.

Good luck and welcome to the club.

 

[macville]

You need to learn the basic of what option is. What does "buy back" and "retain your stock" means is the very basic of what option trading is. All those links that I found and what you found are all too advanced for you at this point.

Here is where you need to start: https://en.wikipedia.org/wiki/Option_(finance)

I understand options as they are not that complex. I am talking about the mechanism in how the options are actually written/traded/executed and how the buy back works.

Here is the article < https://pocketsense.com/can-seller-call-option-buy-back-3021.html > that has me wondering how the buy back actually works. "When you sell a call option, whether covered or uncovered, you create an open position. Options are traded in a double auction market, with a bid and asked price. Although there is a specific buyer and a specific seller for each option, there is no way to buy back the original option that you sold. You can, however, enter into a closing transaction which eliminates your short position. A closing transaction for a short call option position would be to purchase a call option for the same underlying security with the same strike price and expiration date. The two options would cancel each other out, effectively eliminating your position."

So the word I have issues with is "effectively" because if you effectively "buy back" your shares, that doesn't necessarily mean you've actually bought back YOUR shares. I am not saying this is how it works, but the way that's written it make it sound like, you sell a call, the price gets over strike and is executed. However, you bought a put the day before for the same strike price as your sold call. So your shares were called away but you had new shares called to you for the same price so "effectively" keeping your shares at the same price, just minus the premium you had to pay for the call (the "buy back.)

If it were actually to work that way, there would be capital gain issues because even though you end up with the same amount of shares at the same price, your shares would be sold and repurchased and therefore triggering a capital gains event.

It looks like with what thefuturestrader kindly posted, how it actually works is, when you "buy back" the option you are not actually buying it from the original buyer, but from another person, but since the OCC is the middle man, they are linking the buyer of your sold call and the seller of call you bought to trade the stock. Therefore, it leaves you out of the trade in the end and doesn't cause your stock be be sold and then repurchased, causing a capital gain realization on the stock.

I guess ultimately what I was asking was, with an option buy back does it trigger a capital gain realization?

 

[macville]

An important distinction about two different strategies trading covered calls:

1. Your trade is a combination of buying the underlying and selling a call simultaneously.

2. You own some stocks and sell calls to "generate" premium. You have no intention of selling your stocks. Many websites claimed this as "free" money/income.

If you are serious about selling covered calls, #1 is the correct way to look at the trade and you usually analyze the pair and find one with the highest expectancy to trade. There are many screeners from brokerages that screen candidates.

#2 is unfortunately where most of us newbies go. Namely wrongly think that we can generate free income from owning the stocks and writing covered calls. If your intention is to always buy the stocks back, it is equivalent to selling naked calls.

On average, if you sell calls regularly, you will usually not net extra profits compare to buy and hold. How do I know? I mechanically traded hundreds of covered calls (most of them OTM) on stocks I owned in 2013 and netted a loss (compare to buy and hold). To add insult to injury, because some of the stocks were called away, I ended up had to buy them back and paid capital gains.

What stocks were you selling calls on and how long out? Were you diversified-selling calls on multiple stocks at the same time to try and average out your win/losses? Why did you let the stocks get called away? Was it not worth it to you to buy the option back?

I am looking at selling calls on stocks I own with an IV of 20-45 and selling at around 1 SD at out no more than 30 days-trying to play it pretty conservative. From looking at the historical data on the stocks I want to do this with, they don't jump around crazy numbers on really good days. For example, today was a great jump for the market, my call sell potential lowest stock jumped 1.35% and my highest jumped 6.4% with an average of 2.29% overall. However, my portfolio is currently less growth stock and more value/dividend stock (which has been really nice with this downturn.)

I would also say that right now with what's happening on the market since Sept, it's a different market right now for selling calls vs 2013. If I really thought we were still going bull I would be selling puts, not calls (although I am selling puts for certain stock I want.) The biggest issue is where you get days like today when traders/investors want a good day on the market for a change and drive up the market for a very short period. We've already had three since the start of Oct and I think today was just the start of another one unfortunately. If the Fed and Trump both chill I'll think we have a chance of going bull again, but right now they are two wrecking balls in a china shop But buy while the blood runs in the streets!

 

[ironchef]

What stocks were you selling calls on and how long out? Were you diversified-selling calls on multiple stocks at the same time to try and average out your win/losses? Why did you let the stocks get called away? Was it not worth it to you to buy the option back?

I am looking at selling calls on stocks I own with an IV of 20-45 and selling at around 1 SD at out no more than 30 days-trying to play it pretty conservative. From looking at the historical data on the stocks I want to do this with, they don't jump around crazy numbers on really good days. For example, today was a great jump for the market, my call sell potential lowest stock jumped 1.35% and my highest jumped 6.4% with an average of 2.29% overall. However, my portfolio is currently less growth stock and more value/dividend stock (which has been really nice with this downturn.)

I would also say that right now with what's happening on the market since Sept, it's a different market right now for selling calls vs 2013. If I really thought we were still going bull I would be selling puts, not calls (although I am selling puts for certain stock I want.) The biggest issue is where you get days like today when traders/investors want a good day on the market for a change and drive up the market for a very short period. We've already had three since the start of Oct and I think today was just the start of another one unfortunately. If the Fed and Trump both chill I'll think we have a chance of going bull again, but right now they are two wrecking balls in a china shop But buy while the blood runs in the streets!

Sounds like you have hell a lot more knowledge than when I started. I jumped in with no clue. I had about a dozen stocks in my portfolio that I owned for years, read about low risk "free" money writing covered calls, wrote (OTM) calls on all of them, at first with short expiration of days/week, then some kind soul here told me I should write longer durations contracts.

There were many reasons why I let the stocks been called: Stupidity; Deer in the headlight when gap-up; wishful thinking hoping things would correct themselves; early exercises; too many contracts to manage....

I still write calls and puts, but no longer blindly.

 

[JSOP]

I guess ultimately what I was asking was, with an option buy back does it trigger a capital gain realization?

Yes it does IF you made profit. For details, ask the IRS (if you are an American) and/or your accountant.