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Strategies & Market Trends : How To Write Covered Calls - An Ongoing Real Case Study!
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To: robwin who wrote (13064)7/19/2000 11:28:15 PM
From: Bridge Player  Read Replies (1) of 14162
 
(Ignoring all commissions and interest on credit balance)

1. You buy 100 shares of stock at $50.00 per share and pay for it in full. You account balance now shows net equity of $5000, no credit or debit balance.

2. You sell 1 55 call for $800. Your account balance now shows net equity of $5000, with a cash credit balance of $800, as follows:
Stock: $5000
+ cash: 800
- contingent liability: -800
-----------------------------
Total: $5000

3. As time passes over the next 3 months, the value of the stock and the short option will change. But the $800 credit balance stays the same. At 4:00 PM Eastern time of the Friday before Saturday expiration (stock options expire on a Saturday), your account will now read:

Stock: $6000
Cash: + 800
Short option: - 500
---------------------
Total: $6300

4. The following week after the stock is called away, your account will of course show $6300 in cash, the 800 cash and the 5500 that you received from the sale.

Q1. The debit in the account will be a negative 500 at expiration, and stays there during the weekend (assuming that the sale shows in your account on Monday.) The liability disappears at the instant the stock is sold.

Q2. Nothing is deducted from the $5500 in cash that you receive upon sale.

You bought the shares for 5000; sold a call for 800 premium; sold the stock at 5500. You made $1300. You did good.

BP.
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