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Strategies & Market Trends : How To Write Covered Calls - An Ongoing Real Case Study!
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To: Herman J. Matos who started this subject7/19/2000 10:42:49 PM
From: robwin  Read Replies (3) of 14162
 
I had another argument with my friend who like me, is new to covered call writing.

Perhaps someone can set one of us straight.

Example

100 shares of ABC stock is purchased at $50.00 per share.
1 $55.00 call is sold with a premium of $8.00 paid with an expiry date apporximately 3 months away.

If the stock price on the date of expiry of the call option is $60.00, the stock will be called away and the owner will receive 100 shares X $55.00 = $5,500.00 for his shares.

Question:

1. What happens to the debit in the account for the value of the call option on expiry date?

a) Does the debit disappear from the ledger as a liability?
b) Is the intrinsic value on expiry deducted from the monies given for the shares called away? (i.e. if the stock closes at $60, the $55.00 calls will be worth $5.00 on expiry date).
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