covered call credit spread? GE

Discussion in 'Options' started by prc117f, Feb 28, 2009.

  1. prc117f


    Is this possible?

    I have GE stock in my portfolio I bought for 15 dollars but I want to hold for long term but hedge some

    I have 2400 shares

    can I write a covered call 24 contracts of GE for april at a strike price of 8 dollars which means I collect 1.70 per share

    Then buy 24 contracts of GE for april strike price of 9 dollars for 1.14 a share.

    This leaves me with .52 (- .04 commision)

    then with the .52 x 2400 = 1248

    Buy 145 shares of GE and end up with 2545 shares of GE stock which also helps lower my cost basis.

    I understand GE could go to 0 I am fine with that scenario.

    If GE is trading between 8 and 9 on April I will get assigned obviously on expiration.

    But if GE somehow jumps to 13 (some miracle news) Then my calls I was long (the 9) will 4 dollars intrinsic value correct?

    so 3-4 days before expiration I can sell those calls and collect 4x 2400 = 9600 right?

    Just thinking outloud. So I can collect some psuedodividend but not to lose potential upside due to long the call.

    My longterm account is cash, does it have to be a margin account to go long a call?
  2. Subdude


    Right. Except that you are also short $8 calls which at that point are worth $5 bringing you to 0.48x2400 in unrealized loss. Also, it is highly unlikely your broker will allow you to use the spread premium to buy more stock, i.e. it will sit in your short account.

    I think you are confused about the degree of your hedging, my friend. Let's say you do as you suggest and buy the bear spread of $8/$9 calls. However, you are forgetting that you are still WAY net long GE because you still holding 2.4K shares long. In fact, your hedge is only the $0.52 from the bear spread. If GE closes below $8 on expiration day in April, then you have pocketed $0.52 per contract and all is well (of course, you still have over $7/share in unrealized loss in your long stock position, but that's beside the point) :eek: If it closes between 8 and 9, then you are forced to close your long stock taking a loss, which may not be a bad thing btw. If it closes above $9, you lose (1 - 0.52)=$0.48/share (see your question about the case when the stock goes up to $13).

    Quite honestly, when you are this far into loss, there is no good way of hedging your way out of it... if your broker has it, maybe you could short some single stock futures. Or simply go long on low-cost puts, like March $5, a lot more than 24 contracts though.
  3. The short answer is yes, if you were not assigned early, due to the long call, you would collect the dividend and participate to the upside.

    The long answer is that up to 15, your participation would be the gain on your extra 145 shares which were purchased with the option proceeds. Above 9 and up to 15, the gain on the 24 long calls would be recovering the paper loss on the 2400 shares purchased at 15.

    As for the scenario where GE miraculously jumps to 13 by expiration, yes, you could sell the 9 strike calls for for +4 or +9600.

    And no, you do not need a margin account to do this.
  4. Well my friend, I think you missed the point of the question. He acknowledged his downside. He's asking about about whether his option adjustments cede the upside potential (which means recovery up to and profit above 15), not about hedging. And if assigned, if so inclined, he can buy back the shares . That will restore his position and the only new problem that will add is a wash sale violation if the position is carried over into next year.

    Ummm, he has a cash account, not a short account. The premium is his to do with as he pleases since there is no margin involved... the short calls are covered by the stock and the 9 strike calls are long. All of this can be done in a cash account.

    The problem is below 8 not above it. You failed to take into account the net premium received as well as the gain on the extra 145 shares purchased with the option proceeds (if GE rises). While I'm not impressed with the possibilities of his option adjusted position, anywhere above $7.97, it does better than outright ownership of the shares.

    You got the first part right. There's no good way out of this other than a long, long term covered call or covered call spread (CCS) writing strategy and a whole lotta luck (CCS not to be confused with the title of this thread). Or in lieu of that, just some plain old stock recovery.

    Buying low cost Mar $5 puts, particularly a lot more than 24 contracts, is no way to hedge his way out. In fact, it digs the hole a lot deeper and leaves a lotta room for GE to drop before the protection kicks in, succeeding only if GE goes well below $5 in mere weeks. That's very possible but it's not a good long term plan since GE could trade in a box for months if it and the market settled down.
  5. Subdude


    WTF are you even talking about? His net credit from the 8/9 bear spread is $0.52 per share, whilst the unrealized loss on the long underlying is $6.50. How does this help his situation??? Even if he could buy 145 extra shares of GE with the spread credit (which I highly doubt), what would happen if the stock kept sliding down?

    And are you suggesting that writing spreads requires no margin account? This makes no sense because writing out of money spread carries risk beyond the received credit. I'd be curious to find out which broker allows you to risk $1 while pocketing $0.52, all without a margin account.
  6. Subdude, I don't want to get into the details of this position, because it is quite complicated as far as if it does the OP any good or not, but I have to side with Spin on the margin issues. He sells covered calls and gets money - that money is his to keep or to withdraw and spend on booze for all the broker cares. They have no right whatsoever to limit what he does with that money. So, he can then buy calls with that money - he can also buy stock.

    Writing spreads absolutely does NOT require a margin account. The money simply has to exist to cover the spread. If you get $100 for a 5 pt spread in a non margin account, your spending power goes down $400. However, this isn't even important here - he is getting the money from the covered calls (of course, now he CANNOT sell the GE stock without closing the CCs) and he is buying calls with the money got.

  7. It's clear from your response that you don't understand the OP's question or his position so I doubt that explaining it further would help you.

    OK, I can't resist. Suppose he does nothing and the stock keeps sliding down. How does that "help his situation " if the stock "kept sliding down?" Umm, nothing helps a long directional position if the stock drops. That's kinda what happens when the market goes in the opposite direction that you bet on.

    To repeat what I wrote previously, I'm suggesting that if the OP owns 2400 shares and adds 24 bearish call spreads to it, the 2400 shares covers the short leg of the spread.

    Look at it this way. He owns 2400 shares of GE. Would his broker stop him from selling 24 Apr 8 calls against the stock, creating 24 covered calls? Of course not. Next, he buys 25 April 9 calls. Are you suggesting that his broker would stop him from doing that because it's now a spread and long stock not a covered call and long calls? I think not.

    Thanks for your response.
    It was enlightening. :)
  8. Are you calling me an alkie????

  9. prc117f


    Thanks for your insight guys.

    I know GE could keep sliding to 0 or down to 3 etc.. But I entered a position knowing this is a possibility. Hey shit happens :) But its only money.

    Anyhow What I wanted to do is basically a covered call but not cap a potential upside potential. (ie GE reports better than expected earnings etc..

    So the Following scenarios could happen, thinking out loud.

    You have your no mans land between 8 and 9.

    A. Stock ends up around 8.45, I get assigned as per a regular covered call. I take a realized loss selling at 8.

    Stock could end up at 9.08 but I made sure to instruct the OCC/Broker not to auto assign an ITM I let the call expire without taking stock (not worth paying commission to close) Stock gets assigned away obviously as per standard covered call situation.

    B. Stock could slide to 4 dollars a share GE reports rogue trader, posts a loss. I take a bigger loss (premium not enough to cover downside risk of that magnitude)

    C. GE discovers the Flux capacitor and announces it, Stock flys to 28 dollars a share. I sell the call long and collect, and my shares get assigned as well obviously.

    or GE reports better earnings, goes to 13. I sell my long calls, and my stock is assigned. I still have a realized loss obviously but would have been worse if I sold a basic covered call since I would be assigned and not partaken in the potential upside.

    I figure if I am going to risk my downside why not collect a smaller (but decent premium) and keep my upside open?

    Is there a name for this? I just call it a Covered call credit spread?

    Anyhow thanks for the replys. Just learning here. And if I get assigned It will offset some of my gains.

    Now if I was assigned can I write an ATM put on GE and a OTM call 1 point out as well

    So I can buy back GE but if it is not put to my account I can also participate on the upside as well.

    IRS should not consider that a washsale I would imagine since it is not a like security and I am taking additional risk.
  10. Of course not Spin! Just trying to point out that loot from covered calls is good for anything lol. :)
    #10     Mar 1, 2009