Newbie Options Trading

[bxr140]

Hello... need your expertise please. I sold a covered call $615 for this Fri, and AH is $584 right now. I am nervous of it getting exercised soon. What is your 'not advice' so I can exit my predicament? I am big HODL and would rather pay whatever amt to close the sell than lose the shares.

I guess the main question is: Why? If you close ITM on Friday that means you both a) made maximum profit on time value and b) made maximum value on underlying movement. Like...you literally can't do any better than that with the position. Unless these are shares you bought a long time ago and they're already in some lower tax space, just let these shares go and buy more, ostensibly at the exercise price so ostensibly for zero-sum to your account balance.

The game is all about account balance. There's no need to be a hero and leave profit on the table just because of an emotional attachment to a company.

IMHO:
1. Wait it out. Its possible underlying won't make it to 615.
2. Let them get called away at 615.
3. If you're ITM by a little bit, if you buy back on Friday the B/A spread on the contract will probably be small enough that the stupid tax won't be too unbearable.
4. You can always roll out to next week (or next month, or whenever), though that's a bit of kicking the can iffn you really want to own shares.

Note that usually with non-round-number strikes you don't have to worry much about getting exercised early. Only kooks exercise early and there's not a lot of kooks out there working a $615 early December call.

 

[Knightshade]

Hello... need your expertise please. I sold a covered call $615 for this Fri, and AH is $584 right now. I am nervous of it getting exercised soon. What is your 'not advice' so I can exit my predicament? I am big HODL and would rather pay whatever amt to close the sell than lose the shares. Book cost was $179. I know profit is huge but i care more for keeping the shares than having $.

Thank you.

When you say book cost you mean the basis cost of your shares?

How long have you held the shares?

How much of a premium did you get originally for selling the call?

At close today buying back a Friday expiration $615 call would've been $165... presumably it'll be more first thing in the morning if the AH holds through open, but probably not a crazy amount more.

If you'd be on the hook for short-term cap gains on $43,600 profit (plus the premium of course) then spending $165 (or even 2x that) to avoid the tax is probably worthwhile. Doubly so if you sold it for a higher premium when it had more time and you're not necessarily even losing on the buy back.

Now if it'd be long-term gains, you potentially would be facing 0 taxes (depending on your specific tax situation) so I'd be a lot less concerned if that's the case.... and there's quite a few calls out there at $600 that "they" are gonna try and keep the share price under to close Friday, so could be nothing to worry about at all.


Another option if your gains would be short term besides buying back, assuming you have significantly more assets in the account than just those 100 shares, would be you could buy another 100 and let those get called away... you'd still make a modest profit of a couple grand on the shares plus keep all your premium.

And if the call expires worthless, hey, you've got 100 extra, much higher basis, shares that you'll likely still be able to sell for a profit as the price ramps toward inclusion or if you wanna hang on to them sell less risky (tax wise) covered calls against.

 

[Yoona]

When you say book cost you mean the basis cost of your shares?

How long have you held the shares?

How much of a premium did you get originally for selling the call?

At close today buying back a Friday expiration $615 call would've been $165... presumably it'll be more first thing in the morning if the AH holds through open, but probably not a crazy amount more.

If you'd be on the hook for short-term cap gains on $43,600 profit (plus the premium of course) then spending $165 (or even 2x that) to avoid the tax is probably worthwhile. Doubly so if you sold it for a higher premium when it had more time and you're not necessarily even losing on the buy back.

Now if it'd be long-term gains, you potentially would be facing 0 taxes (depending on your specific tax situation) so I'd be a lot less concerned if that's the case.... and there's quite a few calls out there at $600 that "they" are gonna try and keep the share price under to close Friday, so could be nothing to worry about at all.


Another option if your gains would be short term besides buying back, assuming you have significantly more assets in the account than just those 100 shares, would be you could buy another 100 and let those get called away... you'd still make a modest profit of a couple grand on the shares plus keep all your premium.

And if the call expires worthless, hey, you've got 100 extra, much higher basis, shares that you'll likely still be able to sell for a profit as the price ramps toward inclusion or if you wanna hang on to them sell less risky (tax wise) covered calls against.

I bought them $179 each i think less than a yr? Account is Canadian RRSP (aka American IRA) so no taxes now. Prem $115. I know, i know. Picking up pennies ahead of the steamroller. I regret getting greedy for $115 and potentially losing the shares the next 2 wks. Latest i decide to buy them back is at tomorrow's morning dip? I think buyback approx $165 should be ok. Even $200 prem. I'm just nervous about tomorrow's SP approaching $615. Thanks.

 

[Yoona]

Note that usually with non-round-number strikes you don't have to worry much about getting exercised early. Only kooks exercise early and there's not a lot of kooks out there working a $615 early December call.

Thanks. I hope the Friday $600 max pain protects me. Is there a recommended strategy on how far OTM should a covered call strike price be for a 1-month expiry? I am thinking Jan 15, if possible.

EDIT: I thought the technique is to look for the max open interest of a Friday (ie $700), and then add 10% or so, and that's the strike price.

 

[bxr140]

Thanks. I hope the Friday $600 max pain protects me. Is there a recommended strategy on how far OTM should a covered call strike price be for a 1-month expiry? I am thinking Jan 15, if possible.

EDIT: I thought the technique is to look for the max open interest of a Friday (ie $700), and then add 10% or so, and that's the strike price.

When selling options as the anchor leg of a position I use a combination of technical indicators for likely support/resistance and probability OTM/ITM percentages. If I’m selling OTM I usually don’t like to go any lower than ~75% prob OTM and also make sure my strike is on the far side of a strong technical price.

I would not just look at open interest unless there’s an obvious histogram showing a lot of interest in a price range. Then, yeah, make sure the strike on the far side of that range (but I also use my primary strategy and basically use the open interest as an odds enhancer).

I think it all goes back to what you’re trying to accomplish. If you’re looking to hold shares long term, that’s not super compatible with aggressive covered strike prices. If you’re bullish on underlying price movement, that’s not super compatible with the concept of covered calls.

 

[Knightshade]

I bought them $179 each i think less than a yr? Account is Canadian RRSP (aka American IRA) so no taxes now. Prem $115. I know, i know. Picking up pennies ahead of the steamroller. I regret getting greedy for $115 and potentially losing the shares the next 2 wks. Latest i decide to buy them back is at tomorrow's morning dip? I think buyback approx $165 should be ok. Even $200 prem. I'm just nervous about tomorrow's SP approaching $615. Thanks.

Apologies I totally missed the CDN flag on your profie.

If they're in a tax-consequence-free account I'd be massively less concerned about having the shares called away unless the stock closed t WAY higher than the strike which does not seem likely this week... if it closed at 615.01 and you lost the shares for effectively $616.15 you could immediately buy them back (assuming it didn't move further before the broker sells em) and still have a profit- or potentially even buy them back a touch cheaper if there's a dip any time Monday.... there should still be another full week to come before the S&P stuff gets heavy.


But if it's really bothering you that much psychologically, just eat the $50 or so net loss and buy it back.... (and consider if selling CCs is really for you or not long term)