Hi Mark, Hello Pr,
Today, I executed my first covered call trade. Need some clarification.
Bought EXM 1500 shares cost $37.40 now at $36.64
Sold SEPT 60 Calls @ 2.10 and received credit $3150.00
1) If stock closes around $50 on Expiration Day and Premium goes up to 6 from 2.10, what will be my gain?
1500 shares * (50 - 37.40) = $18900
Sold call loss 15 (6 - 2.10) * 100 = $5850
For clarity, let's discuss
the numbers per 100 shares.
First, the call does not climb to $6. If it closes 10 points
out of the money (strike = 60), it is worthless.
Thus your profit is $1260 (multiplied by 15) PLUS the option premium
of $210 (multiplied by 15) per contract.
Does this mean my gain will be $18900 - $5850?
If the option were truly
price at $6, yes, that would be your gain.
But, the option would ONLY be priced
at $6 (at expiration) when it's $6 in the money - and that means the
strike price would be $44 (if stock
is $50). In this situation, the option is worthless.
Must I buy the call to close once I sold it to open?
You have three choices.
You can buy to
close, if you prefer to do so. You are not obligated to buy it.
Just in case your question means: If
I do buy the calls, must I mark the order 'buy to close?' If that is
You can allow it to expire worthless when it is out of the money, per
You can allow the call owner to exercise the options and buy your stock
at the strike price. This
occurs only when the stock is above the strike price at expiration
(above $60 in your example).
the answer is yes.
2) If stock goes to 65, my gain is limited up to $60 which is $22.5 per share or $33900. Who keeps this gain or does
this gain reduce as the premium for 15 sold contract goes up?
Your gain is limited to
$22.60 per share PLUS the $210 per option contract.
You keep that gain. It's yours. The maximum profit is a constant
number, no matter how much above the strike price the stock rises.
The option owner keeps all gains above $60 per share. That is the
reason the buyer bought the calls in the first place.
That person is seeking large profits in the event the stock undergoes a
substantial price increase. To make a profit, if
the call buyer keeps the options through expiration, then the stock
must be above 62.10.
3) When will be the best price/time for me to close the sold option position? Do I buy to close before expiration day?
There is no 'best' time
or price. Remember, if you decide to buy your calls to close, you will
be left with the stock position, and it will be unhedged.
One time to buy back the call is when the price drops so low, that
there is little to be gained by holding the short position any longer.
For me, that might be when the option hits $0.25. Some traders would
never buy it back, hoping it expires worthless. For you it would be a
different price. There really is no 'best.' This is something you
must decide for yourself. It will become a much easier decision as you
gain trading experience.
If you decide that you do want to buy back the options, the last
possible day you can do that is expiration Friday. But, there is
little reason to buy it back if you waited that long and it is still
our of the money. Thus, one plan might be to buy it back at $0.25 any
time before Aug ust expiration and then reduce that price by $0.05 per
week. The nearer it is to expiration, the less you should be willing to
pay - as long as it is far out of the money.
You may by them back any time (after you sell the options) you
want to do so.
Any info will be greatly appreciated. My pleasure.
Mark D. Wolfinger
The Rookie's Guide to Options:
The Beginner's Handbook of Trading Equity Options