Dear Mark:

Have you had any experience with hedging employee/executive stock
options by writing listed calls?

John Olagues

 

Hi John,

No. I have no such experience. There is nothing wrong with your idea,
but it may be troublesome.

First, to be considered 'covered,' an option must be written against a
long stock position. Thus, if you do write some exchange-traded calls,
your broker is going to consider them to be 'naked short'. That presents
2 immediate problems. Some brokers do not allow the sale of naked calls
under any circumstances. So, if your broker is in that camp, you must
find a new broker. In addition, naked call selling requires substantial
margin. But, if you have a broker who allows naked call sales and if
you have substantial assets, then margin will not be a problem for you.

Second, if an option you sell goes into the money, and if you do not
close the position by buying it back, you will be assigned an exercise
notice (either at, or possibly before, expiration). That's not a
problem if you are willing/able to carry short stock as a hedge. But,
if you cannot carry short stock, then you want to be alert to the
possibility of being assigned an exercise notice.

The unfortunate part of this situation is that you will not be able to
deposit your long options into your brokerage account to reduce margin
requirements. But, that should not stop you - if you are in position to
post the necessary margin to carry naked short calls.

I like your idea. Please let me know if you carry out this plan.

Best regards,

Mark