Exactly!!! That is where you are. Forget all this other mish-mash. You forfeited any further gain in the stock when you sold the covered call against it. Your gain on the stock is from your purchase price to the call strike price. That is it. Plus you get to keep the proceeds from selling the call. You regret the decision you made to sell the covered call because the stock went higher but there is nothing, get this, nothing you can do about it now.
This post should be red quite carefully to understand the examples exactly. This post boils down to: QUESTION1 and QUESTION2. For example, if the margin is $120,000 as the stock itself is worth $60,000 and having a loss on the option of -$8,700. Wouldn't that be possible to use the margin in this case? As the stock gain and loss in the option is a null event, this leaves us altogether at the moment with a small gain. It would be the premium: $1300 To keep in mind for below trading scenario idéa question (gain from $50 to $60 = 20% gain in the stock) Now I am taking a trading scenario. (I assume that we can have the cash loss or -$8700 on margin and keep the 100 shares?) As we have $1300 in profit at the moment. Now let us assume that we sell a new option for $1300. The stock will now decline to $50 again the next 6 days. The scenario should then be: 1. $50 * 1000 shares = $50,000 2. Option cash loss on margin: -$8700 + $1300(premium) = -$7400 Total worth: $50,000 - $7400 = $42600 QUESTION 1 So we are back to where we begun at $50 a share but our total worth is now only: $42600? ......................................................................................................................................................................................... Now I am thinking of another idéa with the above scenario in mind to see if it is possible to do a better approach using the --same procent-- amount of premium as above example. Instead of buying only 1 stock, we will buy 5 different companies to diversify the risk of huge gains. The scenario would behave like this the coming 6 days: 1. 1000 shares of Stock A á $10. Option strike $10 with premium: $260 (% gain next 6 days: 20%) 2. 1000 shares of Stock B á $10 Option strike $10 with premium: $260(% gain next 6 days: 1%) 3. 1000 shares of Stock C á $10 Option strike $10 with premium: $260(% gain next 6 days: 2%) 4. 1000 shares of Stock D á $10 Option strike $10 with premium: $260(% gain next 6 days: 3%) 5. 1000 shares of Stock E á $10 Option strike $10 with premium: $260(% gain next 6 days: 4%) Procent premium: $260/ $10000 = 2.60% Total premium: $260 * 5 = $1300 Average % gain in stocks: (20% + 1% + 2% + 3% + 4%) / 5 = 6% We should now have this TOTAL option cash loss when buying back: 1. $10000 - $12000 + $260= -$1740 2. $10000 - $10100 + $260= $160 3. $10000 - $10200 + $260= $60 4. $10000 - $10300 + $260= -$40 5. $10000 - $10400 + $260= -$140 TOTAL option cash loss after 6 days: -$1700 Now let us assume that we sell new options for $260. All stocks will now decline back to $10 again the next 6 days. The scenario should then be: 1. All 5 stocks worth: $10 * 1000 shares * 5 companies = $50,000 2. Options cash loss on margin: -$1700 + ($260 * 5)(premium) = -$400 Total worth: $50,000 - $400= $49600 ......................................................................................................................................................................................... QUESTION 2 So we are back to where we begun at $10 a share but our total worth is now worth as much as: $49600 compared to $42600 in scenario 1? My question here. By diversify with many stocks and lower the risk of huge swings on average on the upside we could lower the risk to have lower cash option losses exactly as described in my SECOND scenario, - and by this more safe to keep the shares and have the opportunity to use the margin for the option cash losses?
If you want to take the loss that means you want to keep the stocks in your portfolio. In that case, the typical thing I would do is to roll the options out and up such that I should still collect a small premium. If the stocks do nothing or decline, the new options will expire worthless and I collect a profit. If the stocks keep going up, perhaps I can roll up and out again. The only time I lose is if the stocks take off and go up by a lot, in that case they will reach a point when I can no longer roll up and out with a positive premium. Then I let the stocks be called and call it a day.
Thanks, so rolling out will make the loss a bit smaller but not remove it entirely where we still can owe on the margin and by rolling out we can then work towards paying back on the borrowed margin if I understand then.