I struggle with those 2 questions but have not yet found any answer when reading about this on google?
What does this mean? Does this mean that if we sell a call option and receive for example 1 dollar premium. Does this mean that if we now get assigned, we do KEEP this entire 1 dollar premium because we got assigned?
If you sell a call for a dollar, it can be exercised up to 5:30 pm approximately the same day so it doesn't have to happen during trading hours - be careful... If exercised, you will get to keep the $1 dollar premium and the broker will take your 100 shares of stock. If you dont have stock, your account will show you short 100 shares the next morning. As per earlier comments, the chance of being exercised is reflected in the time premium which equals the put option price. I have seen a few high dividend paying stocks not have their call options called away - NLY as an example and a few hedge funds have tried to make a few pennies by selling small lots of calls to increase the chance the someone does not want to pay the $15 dollar exercise fee per strike. This is small money at best and after commission is break even.
Thanks for answer. I wonder something here. I will try to create a scenario: 1. Ex-dividend is tomorrow and it is 30 minutes until the market close for the day, - so we buy 100 stocks in NLY for example. We also sell a call at the same time where we collect 1 dollar premium. 2. Now when it is 15 minutes to close, we get assigned so our 100 stocks is called away and we keep the entire 1 dollar premium. Assuming the stock didn't move during the 15 minutes, - Doesn't this mean that the whole scenario/trade have a net 1 dollar profit because we got assigned?
Yes - you made $1 dollar in option premium assuming strike price is ATM/Higher or what you bought the 100 shares for. The question is what did you lose in dividends that the other trader earns from your 100 shares of stock in the morning? It probably is more than $1 dollar as he wants to make money too. Then the execution of the trade itself - buying the stock and sell the call at $1 dollar. Can you get filled at your price?? These can be illiquid options and spreads can be crazy. What can happen is he forgets to exercise his call option and you dont get exercised and collect the dividend while being short the call with no risk since you own the stock. Thus the stock drops to reflect the dividend and the short call value drops as well. This happens but is rare...
[QUOTE="2. Now when it is 15 minutes to close, we get assigned so our 100 stocks is called away and we keep the entire 1 dollar premium. Assuming the stock didn't move during the 15 minutes, - Doesn't this mean that the whole scenario/trade have a net 1 dollar profit because we got assigned?[/QUOTE] You wouldn't get assigned "15 minutes to close" Assignments are done after the close.
I can't really grasp it yet, I wonder if it is something I miss. I will take a real example. I did look at the stock CSCO. Lets assume it is the ex-dividend tomorrow: 1. Stock is trading at 30.09 2. We buy 100 shares of CSCO. 3. Strike 29 has a bid: 1.35. We sell this ITM call option. As this call option is ITM we can say that is most likely that we get assigned and our 100 stocks is called away. Now is my question, - have we now earned 1.35 dollar which means a total profit of 135 dollar or am I missing something. It seems to easy?
If you buy the stock at 30.09 and sell an option at 29 strike + 1.35 premium = 30.35. The difference is a profit of .26 cents before commission and exercise costs.
Yes, that cleared something out. So it is the "timevalue" we should look at as profit? As I am the seller, I wonder if there is a commision, taxes, assignment cost to this 0.26 cents. If so, how much can those costs be approximately in total? As a beginner of this I wonder, when my 100 stocks is called away, does this mean that the money: 30.09 * 100 shares = 3009 dollar goes back into my account so they doesn't dissapear? I am not exactly clear what actually happening in practice there.