Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Gold/Mining/Energy : Big Dog's Boom Boom Room -- Ignore unavailable to you. Want to Upgrade?

To: katytrader who wrote (84842)	5/19/2007 7:52:47 AM
From: ChanceIs	Respond to of 206325

>>>a near-term call written against a leap as "technically not covered."<<< That is a tough one. Schwab is a little draconian in handling the opposite configuration - a short term option covering a longer dated option. For example, if you create a vertical spread by shorting an August call, but cover it by buying a June call with a higher strike, Schwab will not acknowledge the existence of the June covering call, and require full margin to support the naked August call. If you had purchased an August covering call with the same strike price as the June covering call, or one further out, say November, then you would be awarded coverage and only have to provide margin (cash) to cover the width of the spread. I protested and said, 'look, the day before June expiry, I will buy the covering July call at the same strike.' They said tough darts. You suggest that a short term call will not be covered by a long term one. This makes little sense to me. It would seem to me that you could exercise the longer dated one at any time to cover the shorted call, whether or not it had been assigned. The margin requirements might differ between the shorted call and the resultant short position in stock should assignment happen, and that may cause some grief with your broker's computer system. In the extreme sense, there could be a default on the long dated covering call. A call in your account is not quite the same as stock literally in your account covering a shorted call. When you have the shares, you have the shares. With call ownership, you have the right to go buy shares at the strike price, but you literally don't have them. Default on an option contract is not credible today. Our markets work too well, the the exchange will make good on an option contract which the writer refused to honor - and then go ban the deadbeat writer for life. There is some possibility that if all call writers defaulted at once, that an exchange could be wiped out. Not likely. So I do see a very minor technicality to argue the case that a long dated call doesn't cover a closer dated shorted call. Why is love like an option???? You have to put something down (a premium) in order to get the game going - go out on a limb a little. Then you have to wait to see if it gets into the money - it might never happen - and you end up holding sand. Or it might go way into the money and then you have one of those wonderful "best things in life are free" deals going. It sure isn't like stocks or bonds - no steady dividend or coupon - very unromantic and of limited upside.