In the Money covered call + premium

Discussion in 'Options' started by medisoft, Sep 13, 2010.

  1. medisoft


    Hi! I'm a little newbie on options. I started with beginners options, like covered calls, but I have a doubt.

    I bought 800 titles of a stock, and after that I sold 8 contracts on a covered call in the money.

    The price of the stock was about $6.5, and the strike I selected was $6 with a premium of $2.5, that gives strike+premium=$8.5.

    The stock is now trading above $7 (about $7.2). Its value is greater than the strike, but not greater than the strike+premium. The contract expires on September 17 2010, if at expiration time the stock is below $8.5 (strike+premium) what I should expect to happen?

    Does the buyer will exercise the option call, assuming part of the loss of the premium? or it will expire worthless?

    Thanks :)
  2. Incorrect. you sold a call with intrinsic premium so your profit would be 2 not 8.5

    The call you sold means the buyer has the right to take your stock away from you at 6 dollars a share regardless if it is even only trading for 6.10 dollars a share.

    They deposit 6 dollar x 800 shares = 4800 dollars of cash in your account

    if you add the 2.5 premium sitting in your account (which include intrinsic value) 2.5 x 800 = 2000 + 4800 = 6800

    You paid 6.5 x 800 = 5200

    So 6800 - 5200 = 1600 dollars your profit on monday after expiration friday

    all the stock needs to do is go 1 penny over the strike price and you lose it.
  3. medisoft


    I know that only 1 stock over strike then it can be exercised, but the question here is, if the buyer paid 2.5 premium (i mean 2.5*100 per contract), and right now if she exercise will need to take a loss, is it probable that the buyer actually exercise? Or will let the contract to expire?
  4. The stock is ARNA. You are going to lose 50%+ on the long. So just get out now at a loss.
  5. people should stick to SPY and/or IWM when deciding to short options. Single stock is TOO risky for a beginner who still needs basic options math training :)
  6. medisoft


    can you explain why it is going to lose? I'm using virtual trade, so I want to learn why it will lose.

    Also I'm testing with some other symbols (ARNA is one, QCOR other, VXX and so on)

    Right now ARNA max risk is limited to about 30%, also the max gain is limited about 25% on September. If it reaches the strike (or the strike+premium, is the question I have) ARNA will be sold, if not, and it declines, I have the cushion of the premium, and a protective put in the distant future. The strategy gives to me an approximate max loss of 30% and a max gain of 7-6.3+2.5 (strike-purchase price+premium)

    Correct me if I'm wrong, and please explain me what you refer about loosing 50%+ on the long. Does ARNA stock will decline more than 50%? or it will soar 50%+ if it is approved?
  7. What happens if the stock goes due to some lawsuit and the stock is only worth 1 dollar.

    the covered call does not protect you from that.
  8. medisoft


    Is the same with covered calls?

    I know that uncovered calls are very risky, but covered calls of value or growth stocks should not be too risky, isn't it?

    I read that a value/growth stock with a covered call on it is less risky than the stock alone.

    Value = P/E 5-25 P/B 0.2-2 ROE >15% ROA>ROE*70% CR>=2 D/E<1 and other parameters
    Growth almost the same, but with P/E higher (less than 35) and with good prospects of earnings growth

  9. medisoft


    But what about the far future (>5months) long put plus the premium?

    Thant protects partially the invest, isn't it?

  10. medisoft


    Today the stock was about 4.3, down from the 6.5. With the strategy I'm testing, I have a 4.5 put and with the covered call at 2.25.

    The current value is

    call: 2.25
    put: 1.8
    stock: 4.35

    That leaves with total value of 8.4. If I bought it at 6.5, at this time I'm in loss with the stock, but with a total profit of 1.9

    Is that correct?
    #10     Sep 14, 2010