On these type of scenarios it is always beneficial to run different price scenarios to see the potential maximum gain and maximum loss.
A long dated option will have a lot more time value than a short dated option. Let's MSFT as an example. Since, you didn't say whether you bot them recently or held them for a spell, I will play out both scenarios but I don't have access to old prices so I will "guess"
Today MSFT closed at $201.30. For scenario 1 let's say you bot on 3/30 when MSFT was about $160.00 or today (Scenario 2)
You said 1.5 years so I pick the Jan 21, 2022 options $200 strike which closed around $31.60 (midpoint avg)
In scenario 1, I am guessing that maybe you paid around $18.00 a contract or $1800.00 that would give you an approximate gain of $1360.00 (if you sold)
If you go out a month, you could sell the AUG 28th $210 call for about $430
IF MSFT stays under $210, you pocket the $430 (and can repeat the process) .If it closes over $210, you have several options.
Let the call be assigned in which case you would be short MSFT but long a call that limits your exposure. I think, this type of trade would have to be done in a margin account as well. At this point, your short position is "hedged".
Again you have quite a few options, you can buy the stock back and simultaneously sell the long call. The call you have quite a bit of Time Value remaining so this might be the better play (as opposed to waiting for expiration and you'd be responsible for the dividends.
If you hold the position and the stock declines, you could close out the short at a gain and still be long the call.
Another possibility is to roll the short option and sell another further out at possibly a higher strike premium. For example, if it is at $212 near expiration, you may be able to buy the call back for $2.50 and sell the SEPT $220 for a similar
Another possibility if you are assigned is to write puts versus the short position.
There are all sorts of "games" that you can play with these types of positions. Much depends on your overall outlook for a particular stock and the market as a whole. Premiums are very rich now especially for some stocks. That tends to change.
so in answer to your questions:
1) Yes, it depends BUT you usually roll the call if it goes into the money. I roll them all the time.
2) If the market tanks, and you hold the short, you will make money on that but may lose on the long option.
3) The broker just makes sure that you have the equity to cover the trades and the proper option leve; approval. It will require a margin account. Sometimes shorts can be closed because of lack of ability for a brokerage to borrow. |
