I'm learning options through the TOS simulation platform. I sold a call to try and pocket some premium. Overnight, the underlying gapped up breaching the strike price, but not the premium which was 7 or so dollars. In this situation. Would it be best to just cut losses and buy to close at the higher rate? Or wait it out and see if it doesn't drop a bit before expiration Second, if this was real world... what's the likelihood that someone would exercise their call considering they've breached strike price but not the breakeven price?
TOS has a great format. First I think your using the best format. Selling a naked call is undefined risk. With undefined risk some traders would consider taking the loss. You can make an adjustment and sell a put at the same strike lowering your break even if the stock continues to rise. But this adds risk to the downside. You can wait because the probability of touch (the probability that the stock will touch the strike of the call you sold) is twice that of the probability of ending at that strike at expiration. There are many things you can do. As a beginner I would focus on defined risk trades like a credit spread and hold until expiration and watch the trade over time in order to learn and understand your risk and probabilities at order entry. The likelihood of being assigned has more to do with the extrinsic value of the call than the actual price of the underlying. The lower the extrinsic value the more likely to be assigned.
Regarding Dividends in an options portfolio. Check out this link for really good detailed information. http://theperfectpassiveincome.com/...aling-with-dividends-in-an-options-portfolio/
Selling a put to cap some loss. So simple yet didn't think about it! Thanks, Robert! I just put on my first debit put vertical spread on MSFT today. Now from my understanding, am I correct to believe that profit occurs when my short strike price(currently otm) becomes itm? Options are a rather tricky thing, I'm finding out.
Your welcome. A debt spread is a directional bet. if its a put debit spread it will become profitable when the underlying moves down.
I like credit spreads because you can make money if the stock doesn't move or it goes your way or even sometimes when it moves against you. A debt spread needs the stock to move a certain direction. The downside to a credit spread is capping your gain based on the premium received. In other words credit spreads have a higher probability of profit but they don't have as much reward as a debit spread. Its a trade off.
Just to clarify something: A put credit spread will behave exactly like a call debit spread (with the same strikes and exp). Also a call credit spread will behave exactly like a put debit spread (with the same strikes and exp). So credit or debit is not really the difference here.