Hi Len,
no, I mean that I have never been called away prior to expiration. Sure, you will always be called out if the price of the stock is in the money at expiration if corrective action is not taken. I have had many debates with various people on the threads when I would assert that even though covered one still participates to a degree in the appreciation should the stock rise in price while covered. Most investors are under the impression that once a call is written, there is absolutely no more to be gained from the stock even if it appreciates drastically, this is false. When not called out prior to expiration, the call writer not only receives his premium from the call but will also participate in a portion of the stocks price ascension. The degree of this participation is determined by what is known in the Options Market as the DELTA ( simply stated and I do not want to get into detail about such but suffice it to say that " the delta of an option is the amount by which the call will increase or decrease in price if the underlying stock moves by 1 point). I do not need the STRESS of going into all the precise formulas etc. Let's just say that if and individual had 1000 shares of QCOM and wrote a call at the $140 strike price and the stock is currently trading at say $120 and he received $9,000 for the write. The next day QCOM goes to say $130. Now most people think there is no participation in this increase by the call writer. This is false, remember there is absolutely no connection between the stock and the option other than it is considered covered, so as long as an investor owns the stock and is not called out, any appreciation is treated as a credit to his account. Now the call also goes up in price and this will be show as a debit in the investors account. Now we know the stock went up $10
right, how about the call, well it depends on the delta but let's say it moved up $6. The difference between the two is $4, that is an additional $4,000 that is credited to the writers account.
V |
