You're talking about selling a call, right? So, if SPY falls to say $80, you paid almost $12,000 for a position now worth $8,000. So, yes, you keep the shares, but they are worth a lot less then your total expense was. Of course, it may not be a realized loss until you actually sold the shares. JJacksET4
Oh. When I saw the risk/reward graph for a covered call, it showed potentially unlimited losses, so I thought I was missing something. But how is it unlimited? You've got the cost of the premium + what you paid for the stock. Even if the stock goes to zero, that's not unlimited. So what am I missing?
owning the stock means you are long selling a call in the money means you think the stock is going down don't like that
Well, there is never really "Unlimited" risk to a downside move - of course, in theory the risk could be basically 100% - for example if SPY went to $0 - which would be really bad for the market anyway! Truly unlimited losses are usually reserved for shorting stocks and/or calls that aren't covered. Even that usually isn't really unlimited, but could possibly be several fold what the investment was. So just to clarify - let's pretend there is a stock XYZ at $60 - you see that the 55 calls sell for $1000. If you buy 100 shares, and sell 1 55 call, you will have paid $5,000. That is your theoretical risk then, if the stock fell to $0. You paid $6000 for the stock, but got $1000 for the Covered Call. You can't lose more then $5,000 without adjustments, etc. However if the stock fell to $0 and never came back (like Enron or whatever), you would basically lose $5,000. Of course, a loss of this size is less likely with ETFs and indexs, etc. JJacksET4
Ok now I understand. Yeah, when I see "unlimited losses" I interpret that as "potentially more than you spent/end up owing someone money," such as, like you say, shorting stocks or uncovered calls. I was trying to figure out where the "unlimited" came in, like if I wrote my 120 call for my 100 shares of SPY and somehow ended up owing like $100,000 or something.
Having a short SPY position rise 10 pts is no more painful than have a long SPY position drops 10 pts. It's just 2 sides of a coin. Don't get hung up on the fear of unlimited risk of shorting. Markets don't melt up and anecdotally, they drop 2-1/2 times faster than they rise. Given the opportunity, I'd sooner trade from the short side than the long side.
Of course you are right, but I was just trying to make it clear that going long for say $5,000, you might risk $5,000, but going short, you could lose more then that for example. Of course, this kind of scenario can also be true shorting a call or put as opposed to going long the call or put (possible losses of multiple times the credit received, compared to losing "only" 100% of a debit.). Of course, I know you already know this stuff, but just to try clarify what I was trying to say. JJacksET4