I am relatively new to crude oil options. I am considering shorting a September 80 call for a premium of 2.40 ($2,400). This option expires August 17th but as oil moves higher and higher, I am curious to know what will happen to my option should it expire with September CL trading above $80. Should I be exercised, will I then be short one September CL futures contract from $80? Since I got a credit of $2,400, wouldn't my trade still be profitable until September CL goes above $82.40? Or does CL options operate differently......... I am not asking for an opinion as to where CL is headed. Just want to know how CL options work.
Correct. You would be short a CL futures contract at 80, and would lose money when CL goes above 82.40. This is all quite standard. The tricky part is if CL futures are near 80 at expiration. Then you have "pin risk." Since you're short the option you have no decisions to make, but you cannot be sure if you were assigned or not. You will want to be notified as soon as possible. So if indeed futures are near 80 at expiration, you will need to familiarize yourself with all the exercise/assignment schedules and procedures, and identify a contact person at your brokerage firm you can keep in touch with to find out as soon as possible if you've been assigned or not.
Question, oil crashes up (?) as opposed to stocks & the indexes crashing down, so OTM short calls on CL would be akin to naked puts on stocks/indexes ? Wouldn't a hedged position make more sense incase of a geopolitical outlier? However, one thing I am sure about is that you should get ThinkorSwim because they have a great modeler for options, you can see what your P/L will be anywhere from $80 on up.
Yeah, I guess you could say roughly that short otm calls on cl are akin to short puts on stock indexes in that the wrong kind of disaster and panic would make you an unhappy pappy. Short calls are theoretically worse in that crude can go up infinitely while stocks can only go down to zero. You can get plenty wiped out on short stock index puts though.