Covered Call Question

Discussion in 'Options' started by Turner32, Oct 12, 2007.

  1. Turner32

    Turner32

    I purchased 100 shares of a stock in late Sept. for 4.50 and wrote a $5 Oct call for .75. The stock quickly went up above $6 and has now gone down below $4. When it went up above $6, I could have bought the $5 Oct put for .45. I feel now that I should have bought the put and sold the underlying stock at a $1.50+ per share profit. Buying the put would have allowed me to lock in a profit and protected me against the naked call, right?
     
  2. Instead of spending your $ buying a put, why not just completely lock in the profit from what you had and buy the cc back for a small loss and then sell the stock for a $1.50 gain. Your % gain would have been big.
    Since you bought the stock to start with I'm assuming you like it. So you could just continue to hold the underlying and keep writing covered calls. If it's not below 3.75 now you are still better than break even, not counting commissions.
    I'm also assuming you didn't mean "naked call" in your last sentence, but "covered call" like your subject said.
    If you don't like the stock any more, just sell it and move to the next one.

    On my covered calls, I never buy puts and usually don't buy back the calls. Once I enter the position I know my max gain and accept that with a smile if I get it.
    _________________
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  3. MTE

    MTE

    Wrong, a long put doesn't protect a naked short call. The two together form a synthetic short stock. If you still had the stock position on then you would've been flat - long stock plus synthetic short stock equals zero net position.
     
  4. Poster's numbers are fishy. A $4.50 stk with approx 3 weeks until expiration and the $5 call goes for 75 cts? Now some amount of time passes and with the stock over $6 the Oct 5 put is 45 cts? That's some pretty hefy implied volatility!

    But in the event that the IV was actually that high, after a quick rise to over $6, the call would be more than doube in value, possibly $1.75 or better. After slippage and commissions, questionable if gain is that big when both sides closed out.

    What's the rest of the story?