Covered call writing III
| Aug 2, 2010 Covered Call Writing III
Expectations I've discovered that writers of covered calls often don't understand the rules of the game they are playing. This often leads to disappointment. Let's take the time to go over some basic details. 1. As the seller of a call option, you have no rights. You have obligations. 2. If the option eventually expires worthless, the contract is canceled and you are released from the obligations 3. The option 'expires worthless' when expiration arrives, the option owner has declined to exercise his/her rights to buy your stock at the strike price. Expiration day is Saturday, following the 3rd Friday of the month. You learn whether you were assigned an exercise notice and thus, sold stock, or whether the option expired worthless. That notification arrives before the market opens for trading Monday. If you trade online, your broker will make the information available Sunday. 4. The options should expire worthless every time the stock 's last trade on the 3rd Friday is below the strike price. No guarantee. The option owner still has the right to exercise the option. 5. As the option seller, you may not demand that the call owner exercise the option. Only the option owner decides whether (and when) to exercise. As the seller, all you can do is wait to learn your fate. 6. If you don't want to wait, you may buy (to close the position) the option that was sold originally. This cancels your obligations. 7. If the stock rises and trades at the strike price, or higher than the strike price, before expiration day arrives, DO NOT EXPECT TO RECEIVE AN EXERCISE NOTICE. It is a very bad idea for the call owner to exercise an option earlier than expiration. 8. Many novices (for a reason that is beyond my understanding) anticipate selling their stock just as soon as the stock rises to the strike price. Do not expect that to happen. Do not hope that it happens. It's not going to happen. Possible exception: If the stock is way above the strike price, and if the stock goes ex-dividend before expiration arrives, it is possible that the call owner will exercise and take your stock - just to collect the dividend. 9. In the vast majority of the cases, you must buy back your option or wait until expiration. The chances of being assigned an exercise notice early are slim to none (again, with the possible exception of exercising to collect a dividend). Mark D Wolfinger Expiring Monthly: The Option Traders Journal http://www.expiringmonthly.com/ Read more of my blog posts: http://blog.mdwoptions.com/options_for_rookies/ |