|Aug 2, 2010
Covered Call Writing III
I've discovered that writers of covered calls often don't understand
the rules of the game they are playing. This often leads to
disappointment. Let's take the time to go over some basic details.
1. As the seller of a call option, you have no rights. You have
2. If the option eventually expires worthless, the contract is canceled
and you are released from the obligations
3. The option 'expires worthless' when expiration arrives, the option
owner has declined to exercise his/her rights to buy your stock at the
strike price. Expiration day is Saturday, following the 3rd Friday of
the month. You learn whether you were assigned an exercise notice and
thus, sold stock, or whether the option expired worthless. That
notification arrives before the market opens for trading Monday. If
you trade online, your broker will make the information available
4. The options should expire worthless every time the stock 's last
trade on the 3rd Friday is below the strike price. No guarantee. The
option owner still has the right to exercise the option.
5. As the option seller, you may not demand that the call owner
exercise the option. Only the option owner decides whether (and when)
to exercise. As the seller, all you can do is wait to learn your
6. If you don't want to wait, you may buy (to close the position) the
option that was sold originally. This cancels your obligations.
7. If the stock rises and trades at the strike price, or higher than
the strike price, before expiration day arrives, DO NOT EXPECT TO
RECEIVE AN EXERCISE NOTICE. It is a very bad idea for the call owner
to exercise an option earlier than expiration.
8. Many novices (for a reason that is beyond my understanding)
anticipate selling their stock just as soon as the stock rises to the
strike price. Do not expect that to happen. Do not hope that it
happens. It's not going to happen. Possible exception: If the stock
is way above the strike price, and if the stock goes ex-dividend before
expiration arrives, it is possible that the call owner will
exercise and take your stock - just to collect the dividend.
9. In the vast majority of the cases, you must buy back your option or
wait until expiration. The chances of being assigned an exercise
notice early are slim to none (again, with the possible exception of
exercising to collect a dividend).
Mark D Wolfinger
Expiring Monthly: The Option Traders Journal
Read more of my blog posts: http://blog.mdwoptions.com/options_for_rookies/