Compromise makes a good umbrella, but a poor roof.”― James Russell Lowell
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Life occurs somewhere between our aspirations and our just desserts.”― Stewart Stafford
By Tim Plaehn,
Selling call options, referred to as covered call trading, is great fun and when done right, attractively profitable. Your broker will be happy to show you how to get started with covered call selling.
What they may not be as clear about is what happens after you sell that first call option. I know from subscribers to my Weekly Income Accelerator service that there’s often uncertainty around what happens next. Today, I will clear up those questions.
Selling call options puts you in a “short” position for those calls. The call will show up as a minus quantity in your brokerage account, which will show that negative until either the option expires or you choose to buy it back. In most cases, we hold until the expiration date.
Do not be concerned if you see the price of one of your short options positions go up and then start showing a negative return. Sometimes those negative numbers become frighteningly large. Right now, I see a short call option in my account that shows a 758% loss… but I am not at all worried.
The reality is that if you let your short options expire, you keep the option premium from selling the calls. When the option expires, the contracts disappear from your account, along with whatever shows as the return. If you let them expire, the sold option premium is always 100% income profit in your account.
As long as you are short a call option, you must keep the shares that back the call. If you want to sell the shares, you must first buy back the calls. The price you pay will be the current market price for the calls.
Call options go in-the-money [ITM] when the stock price is above the option strike price. When you sell an option, you pick a strike price above the current stock price, selling an out-of-the-money (OTM) call. If the stock price goes up from there, your short option can go ITM.
If your short call is ITM at expiration, the option will automatically exercise over the weekend. On Monday, the shares will be gone, replaced by cash equal to the number of shares times the option strike price. Since we strive to sell OTM options, having shares called away is a good thing, adding to the trade profits.
There is a possibility that a short options position gets exercised early. You do not have a specific trader taking the long side of your short options trade. When a long position gets exercised, the options exchange randomly assign exercise requests. So if you get a notice for an early exercise on a short options position, that event is entirely random. You may never get an early assignment, but be aware that it can happen.
To recap, when you sell calls, you need to keep the underlying shares until either the option expires, or you buy back the calls. The option prices you see in your brokerage account between selling calls and the expiration date don’t mean a lot. You set your premium income and potential gains when you place the trade, and those results will be there at expiration.
Only those who are afraid, compromise with inhumanity.”― Abhijit Naskar
Thank You & Happy Hunting,
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