|
The Commodity Trading Forum is a presentation of |
|
Free Commodity Chart Service |
|
The Commodity Trading Forum is a presentation of |
|
Free Commodity Chart Service |
| |
Commodity Trading Discussion Forum
|
|
|
|
|
Re: covered call writing question
Posted By: Rick Ratchford In Response To: covered call writing question (debbie)
Date: Monday, 2 November 2009, at 12:37 p.m.
Hello Deb
When the underlying stock reaches the strike price of your SHORT Call options, you are NOT out your options or your stock.
If, however, the CALL option is EXERCISED, then your stocks can be CALLED away. The option itself will no longer exist.
An option can be exercised at any time (US version). It has nothing to do with what the stock price happens to be in relation to the strike price of the option. However, only a fool would exercise an option on a stock that has yet to reach/exceed the strike. So don't expect that to happen.
Also, keep in mind that usually an option won't be exercised unless the stock EXCEEDS the strike (in-the-money).
You can also make adjustments before this happens. If you determine that price is likely to exceed your strike, you can BUY IT BACK and then SELL (SHORT) another at a higher strike. You'll take a small hit, but you have the flexibility to do this.
In the futures, you're not dealing with something you already own, like stocks. Where with stocks your only concern is that you'll have to sell your stocks that you own, and perhaps at a better price than what you paid for them anyway (plus you keep the premium collected on the options sold), with Futures you own nothing.
If you Buy Corn futures, for example, and sell (SHORT) Corn CALL options, you limit your upside potential just as you do with stocks. If Corn moves above the CALL option strike, you could be liable to SELL Corn at that strike price. Your long futures would simply cover this.
So like the stock, you'd be limiting your upside profit potential around where the strike is, since the value of the option to the buyer would increase pretty much in step with the value of your long futures.
Your buffer, is the premium of the option sold. So technically, if you have a 300 Strike and it sold for 5, your buffer would be around 305, not 300.
HTH
Rick
If you want to print this message, you might have better results, and waste less paper if you print this printer friendly page.
| |
Commodity Trading Discussion Forum is maintained by Mike Ritchie with WebBBS 5.00.
To report abuse of this Forum, please send email to: admin1@tradingcharts.com
