Newbie question about writing calls

Discussion in 'Options' started by luckyputanski, Mar 25, 2013.

  1. It's a bit silly, but I'm trying to foresee everything that can go wrong:
    1. I own 100 shares XYZ
    2. I write 1 ATM Call, with normal IV (~ 20 - 30%)
    3. IV goes to sky, my short option becomes hideously expensive.
    4. I'm short this option, so my net liq goes to 0 or negative.

    Putting aside how unrealistic it is, I'm wondering what will a good broker do? Option is still covered.
     
  2. no broker will margin call you if you are covered. and having a different broker won't change your net equity position.
     
  3. So even if my net liq is below 0, all reputable brokers (mainly ToS and IB) will be perfectly fine with this, as long as it's covered? Would it be also ok if I was covered by long ITM longer-term call?

    Thanks.
     
  4. IV could go sky high but what really matters is what happens to the stock (at expiration). If your CC is OTM, u keep the premium. If it's ITM, your shares will get called away at the strike plus the premium. The only way your net liquidity would go to zero is if the stock went to zero. With just a stock and a covered call, u can never go below zero.

    Now the IV could skyrocket and the stock drop and then it could be more expensive to buy back the call and sell the stock. But u may not want to buy it back in this case.
     
  5. Ok, I learnt something new. ATM Call price cannot go above underlying regardless of IV. For a minute I thought, that increasing IV will always causes increase in call's price.
    Here is another scenario:
    Short call is covered by long term ITM call. Underlying's price went up, short option IV went up increasing its value. Long term ITM call's IV went down, losing value. Can my acc's NAV drop below 0?

    Thanks
     
  6. No. It can't. Your scenario happens all the time but your account cannot go below zero on this.