covered call profit and loss question

Discussion in 'Options' started by IronFist, Oct 10, 2011.

  1. So I sold my a covered call a few days ago and collected my premium.

    The call shows in "my positions" with a quantity of -1.

    The price of the underlying has risen, although it is still below the strike price. The option has gone up in value and is showing as a loss on my daily PnL.

    My question is why?

    I understand that if I were to buy to close the option right now that I would take a loss, but I'm not going to do that. I'm going to hold it til expiry and hopefully get assigned.

    So why is it showing as a loss? It's not like I have to give back money I collected on the premium. If a stock is at 50 and I sell a 60 call and at expiry the stock is at 55, I shouldn't have lost any money at all. Why is my PnL showing a loss?

    Am I just reading it wrong?
  2. PnL is showing up as if you liquidated today what would your account look like. I mean just look at it on the flip side. if you buy 100 shares of XYZ stock at $100 a share and then 2 months later it's trading at $300 a share but you still hold it, would you want your PnL to say $0 or would you want it to say $20,000


    Another thing too, The premium you collect from options for 9 out of 10 brokerage firms, contrary to popular belief, does NOT put the money into your account like most people are led to believe that it does.

    For instance if you sell a call at $1 most people believe their account is credited $100. This actually is not the case. Your account has a short position of ($100) which towards the life of the option moves closer to 0..unless it goes completely against you and you end up oweing money on it.

    If your brokerage does actually credit your account for $100 I would be interested to know who you use.
  3. I get that.

    So none of those PnL numbers matter if I'm not going to close the option position? It's just weird. This was my first time actually selling an option and all the stuff I'd read said the premium is yours to keep regardless, not "you get the premium but then your account value goes down if the stock price rises."

    So say I got a $50 premium. Then say price rises to just under the strike price and the option has gone up by $0.6. It's gonna show my option position as $-10 despite the fact that my account is actually +$50.

    Right now my account is showing a loss on the option and it is subtracting that from my positive stock positions. I understand why it's doing that, but it seems like it's going to be wrong when expiry comes. Even if the stock goes up to a million I still have +$50, plus the gain on my stocks up to the strike price, and not a negative number subtracting from my $50 premium.

    Edit - just read your edit. So I'm going to lose money? How can you lose money selling a covered call and having it move up past the strike price? Are you saying every options book and website is wrong? Now I'm worried I'm going to owe money on something that should be giving me money (and closing out a profitable position if assigned).
  4. the account reflects mark to market. if you close that call position today you would have a loss. think of the covered call as 2 separate positions.
  5. Just a quick disclaimer, I actually do tons of covered calls, and consider any position I have that does not have a CC on it is being held naked :) I believe I can correctly call a price of what I believe to be a fair value for my underlying at a certain time, and sell my strikes accordingly..of course being right is a whole other thing :)

    So let me try to answer your comment.

    When you sell the call for $1 yes your account now has a ($100) on it. However, your total account value did NOT go down by $100. It adds the ($100) while keeping your account value the same. As expiration passes and underlying goes nowhere, that ($100) will slowly dwindly, and your account value will rise.

    What I always do to track how much time premium left is pretty simple. This month all of my calls are already at the strike.

    I hold NKE. I sold an 87.5 Oct call for $4.5.

    Today NKE is at 90.33 and the sold call is worth ($3.57)

    The difference between the 87.5 strike price, the currect price of NKE, and the value of the option is 0.74, so I have another $74 to pick up in this position.

    Maybe you understand all this and I am not answering your question correctly and if not, if you could reword your question maybe I could provide a better answer.

    Lastly, your statement proves my assumption, you thought you were credited $50 the moment you sold your call. As you now know, you are not credited $50, thought you will collect the $50 by the end of the expiration month. Whether the stock is lower and your UL is worth less, stock is higher and you get called out, or stock doesn't move. You will collect your $50 by expiration, whether you are down $200 on the underlying so now down only $150 or up $50 in the underlying and now up $100, you WILL collect the premium in full by expiration.
  6. Oh wait, is that covered call position just going to gradually reduce itself to $0 at which point my PnL will be:

    Cost: -$50
    Market value: $0

    PnL: $50


    So as long as I don't close the position out before then I'm fine, right?
  7. Exactly.
  8. not necessarily. if the stock continues to go up the call may not go to 0. time value will go to 0 but it will still reflect intrinsic value. however when the option expires your account will reflect your profit.
    i wouldnt advise playing options until you understand how they work. start small and feel your way.
  9. Btw feel free to post comments on my journal. In my most recent update and attached picture you can notice I'm nearly back to my high water mark while the market is no where near recovered.

    I've been long and fully margined this entire downtrend, yet my solds calls have my nearly back to my old high water mark and ready to set new highs this month. It shows that I've beaten the SPY by about 11% during this downtrend while being fully margined and long in equities through this downtrend.

    Sorry for the sales pitch, but just thought you might be interested in following/commenting
  10. I had been reading about options for a few months, and I tried to start small by selling one covered call. Can't get any smaller than that!

    I'm happy selling my shares at the strike price and assumed from everything I had read that even if price was above the strike price that I would get the profit of selling at the strike plus the $50 premium.

    That's why I'm confused by what I see when I log in.
    #10     Oct 10, 2011