Two observations from my first week of writing covered calls. Well, not exactly that. More accurately, from my one and only covered call. The first is short, the second longer.
I wrote 2 contracts on June NUFO 15s (DBE FC) for $1.30 each on Wednesday on 200 shares I purchased just for this purpose at $14.03. A buy/write strategy.
My first reaction is that writing covered calls is necessarily ambivalent after I make the sale, not just plotting the sale. As the NUFO share price went down (closed on Friday at $13.54), the 15 option premium price descended, down to roughly $.70. I say roughly, because that was the last trade price I saw around 3:30 Friday afternoon. I just checked back and found only the last bid and ask are listed. I then tried to check the CBOE site, and was unable to get on.
So, had I simply bought and held the 200 shares, I would be down $.49 or $98. Were I, however, to buy the option back at $.70, the difference would be a plus $.60 or $120. Net gain is $22 or $11 on each contract.
My second reaction concerns Frank's post #782 and dday's post #804. There is much going on in each post but I wish to focus on one aspect, the likelihood of in-the-money calls being exercised at the expiration point. Never occurred to me. I assumed that some option buyer (a trader) had to exercise for me to be called out. But, on rereading Thomsett on this point, I see that I missed that, in some serious respects, the exchanges are the actual buyers and sellers of the options. And they may exercise the option at expiration. And, had you not planned on it, surprise, there go your shares.
That means, for me, should NUFO close at or above 15.25 on Friday, June 15th, the option may get exercised. Just how high the odds and what the conditions are, are not clear to me. Should you be curious, I recommend dday's post above.
Perhaps every one else using this board understood this little curl. But I had planned without it.
The relevant text from Thomsett goes as follows (p. 72):
"Exercise is not always generated by a buyer's actions, either. The Options Clearing Corporation (OCC) can order an automatic exercise (author's italics) policy acting through the exchange. Remember, the exchange acts as buyer to every seller, and as seller to every buyer. Exercise orders will be assigned as they are made by owners of option contracts. But if, at the point of expiration, there are more open short positions than exercising long positions, those open short positions that are in the money will be exercised by the OCC."
dday adds the equally relevant notion that it may depend on your trading firm's gains/loss picture.
Lessons for me, tentatively, at least, until I learn something different. (1) In a buy/write scenario such as mine, I'm fine whenever called. My risk is on the downside, being stuck, hypothetically and melodramatically with a stock I purchased at $14, now trading at $3. (2) When writing against shares I already own and am not ready to give up, I need to add a new wrinkle. Should the strike price be in the money as expiration time approaches, I need to consider buying the option back.
I also now, Frank, understand that cryptic item you have in your post that the strike price plus option premium total only has meaning for the seller. The seller is not matched against a specific buyer who holds the mirror image.
I now wonder, then about the following. I had thought I would not be likely to be called on my sale until NUFO reached $16.30 ($15 striking price plus $1.30 option premium). I now believe that once NUFO moves above 15.25, there is some unknown possibility and a strong likelihood at expiration. Is that right?
Now, someone, Frank, dday, anyone, I would be very grateful for comments. My apologies for making this post so long.
And, oh yes, Frank, this replaces that very confused private e-mail I sent you a day or two ago.
John |
