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Strategies & Market Trends : How To Write Covered Calls - An Ongoing Real Case Study! -- Ignore unavailable to you. Want to Upgrade?

To: JungleCat who wrote (13509)	1/24/2001 12:52:20 PM
From: Victoria Walley	Read Replies (2) \| Respond to of 14162

I'm sure others may have had different experiences, but I've found first that it is very, very rare to be called out of a position early, even if it becomes very deep in the money. Of course, the call buyer can exercise at any time, but generally is unlikely to do so early. The only time I have been called early was on a stock where the calls I sold were within 2 weeks of expiration, it was just about to go ex-dividend, and the call was several dollars in the money. There was very little time value left in the calls at that point. I have also seen a few times where the call buyer has exercised on the expiration Friday but that wasn't much of a surprise when the call was ITM. Your broker will notify you if this happens, as they would any other time there is a sale in your account. If exercised early, you have no further obligation. The calls you sold disappear and the stock is sold away from you. You have the money and can make your next play. On a volatile biotech, chances are there will be a time value in the calls until very close to expiration. If I were a call buyer, I would trade the calls to lock in profit, not exercise. I also remember, perhaps a year ago, some mention of LEAP call plays using Philip Morris as the vehicle. The object was to sell deep-in-the-money LEAPS, reducing exposure to the stock while collecting the juicy dividend. MO was around $20 at the time and paying around 9%. As I remember, those players did have their LEAPS exercised quite early because of that huge dividend. Lastly, if the call is right at the money or perhaps even slightly ITM (say you sold $15 calls and the stock closes that expiration Friday at $15-1/8) at expiration, you may not have your stock called away at all. It may still be less expensive for the call buyer to buy the shares in the market than to exercise. I'm sure others may have experienced having sold covered calls that expire even deeper in the money than that and still don't lose their stock. You can't count on that, though. Hope this helps! VW

To: JungleCat who wrote (13509)	1/25/2001 1:20:16 AM
From: JGoren	Read Replies (2) \| Respond to of 14162

Generally, all calls where the closing price on Friday is at or above the strike price are called by general convention; those below are not--even if the broker is given no instructions. However, one has to look at the individual brokerage account agreement, for they may require an instruction regardless of the "convention" between brokers. Thus, the optionee could choose and elect to exercise his option even though the closing price is below the strike price. It's rare, but possible. Then, the clearing house looks to those brokerage firms who have a short position (i.e., more calls written than bought) and under one of methods (first option written in first out, random selection) choose which client accounts will have to deliver the stock, and of course, it may or may not be yours. The CBOE website has some great articles on options and discusses in greater detail the above. The articles are in Adobe format and may be downloaded for reading at your leisure, print out or future reference. They also discuss pricing and were, for me, a great help after reading Dan's gracious answers to my questions. The situation in the prior post is pretty accurate. The presence of a dividend paying stock alters the exercise decision. The owner of the stock, not the option, is entitled to the dividend. Therefore, there is an incentive to the optionee to exercise early in order to get the cash dividend in his or her pocket.