Understanding Write a covered call to sell
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Understanding Write a covered call to sell Hi Mark I just read your article. This is what I intend to do Action Sell Call to Open Order Type Market Option Symbol .HLFBG Description HLF FEB 35.00 CALL # of Contracts 1 Real-time Quote $4.4000 Real Time Quote Last Update 02/01/10 3:46:52 PM (ET) Estimated Proceeds $440.00 Base Commission $9.95 Contract Charge $1.50 ( $1.50 per contract) Estimated Total Proceeds $428.55 Does this mean that I get this money before hand and if the stock actually never goes to 35 and keeps going up I just keep the money and walk away? I have several problems with what you are proposing. 1) When you write a covered call, you own 100 shares of stock for each call sold. You make no mention of owning stock. 2) Selling options with a market order is throwing cash down the toilet. Never use a market order. Use a limit order. If you are willing to sell at the bid price and not try to get a higher price, that's your decision (but it's not a good one). But there is no reason to enter a market order. Enter a limit order. 3) The 'real time quote' offered by your broker is a joke. A quote is a bid price and an asking price. It is NEVER the last price. I don't know who your broker is, but they are terrible at what they do. I suggest you never use them to trade options. Find a real broker - there are several good brokers. The stock last traded at $39.48. The CALL you want to sell is $4.48 cents in the money. It has an intrinsic value of $448. If you sell it for any less than it's intrinsic value you are thrown money in the trash. 4) Paying a commission of $11.45 to trade one option is highway robbery. Your broker is not your friend. 5) Toy will net $428 for an option that is worth $448. This is not the way to make money. 6) If the stock never gets to 35? The stock is more than 4 points higher than 35. Are you confusing a put and a call? Perhaps you want to sell the put and not the call? Alas, there i no bid for that option. It is far enough out of the money that (at least when the market closed today) no one was willing to pay anything for that option. 7) But the bottom line is correct: If you sell an option and collect the cash, and if the stock 'never gets to the strike price before the option expires, you get to keep the money. But. In reality it's much more complicated than that. If, for example, you sell a call with a strike price of 90 when the stock is 75, it may look safe. But if the stock rises to 89 tomorrow, that option may be trading for 20 or 30 times the cash you collected when you sold it. What are you going to do then? Just wait for expiration? What happens if the stock rises the next day and now the stock is 95? What do you do then? Risk has grown and you have already lost a bundle. You have been confused somewhere along the line. Your question is not related to a covered call. The option you indicate that you want to sell would be a terrible trade. You don't want to sell or buy options with a market order. If you figure out where you got lost, please resubmit the question and I'll try to help. Best regards, Mark -- Mark D Wolfinger Expiring Monthly: The Option Traders Journal The Rookie's Guide to Options blog:http://blog.mdwoptions.com/Options_for_Rookies |
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