I've come across a non standard option that looks
intriguing. It‘s the Jan 11 45 GMCR. It has a deliverable of
450 shares due to a split back in May. The option is
trading at 98.40. What’s the risk in selling the call? The
stock is trading @ 31.46.
Hello back at ya'
Before I take a look at the specifics, I have to tell you that the professional market makers who trade these options do not make mistakes. If you believe there is an edge here, the probability is very high that you are mistaken. And if they did make a mistake, and if there is an opportunity here, the professional trades have computers that scour the options universe, looking for aberrations. They would have found this. But, let's look - just in case.
The risk in selling the call is that it makes you short 450 shares of stock. Naked short.
So let's assume that you already own 450 shares or else you would not be considering this trade.
If you sell the call, you know that you will be assigned an exercise notice at some point.
So, if you sell the call, you collect $98.40 now and $45 later (when assigned). Total $143.40 per share, or $14,340.
The value of 450 shares @31.46 = $14,157
You would earn an extra $200 by selling the call.
Risk? None when compared with holding the stock. In other words, if you want to sell your stock now, you can earn a bit more by selling the call option instead of selling the shares. However, you would have to hold the shares for another 5 weeks (until expiration). I don't know if you are paying interest to your broker, but if you are, calculate how much interest it would cost to hold the shares for 5 weeks. If it's more than $200, then you would be better off selling shares than selling the call.
Now comes the giant question: Why do you believe that the options 'is trading' at $98.40? It did not trade today, and is unlikely to trade again until expiration (but that's just a guess. The bid is $94.85 and the asking price is $98.25. That means it's impossible to collect $98.40.
The bottom line is that you must know the CURRENT bid price before you can determine at what price you can sell an option.
Forget this trade. You cannot earn any money by selling this call. You would never get anyone to pay more than the value of the stock, and that's $141.57 minus 45, or $96.57.
If any of this is not clear, please follow up.
Mark D Wolfinger