My biggest struggle with options is not being sure what to do (and when) if my original thesis proves wrong. In the case of BAC, the assumption was that the stock will continue to go down. However, the sentiment for the past couple of weeks has been that financials will go up. So, in hind sight, it would have done much better (~15% gain) just buying the stock. In such situations, I’m confused about when to buy back the call or whether to just wait until expiration or whether to roll the option to a higher strike price (and when).
Naresh, you don’t buy back the call, You just wait till expiration, get called out and congratulate yourself on having made the maximum that you set out to do on that trade. Yes you would have made more if you’d bought the stock or a call option but that’s being greedy. Woulda shoulda coulda. With this trade you set out to make about 3% on your money and that’s what you did. Now you can do it again next month.
Why would you not just do the arithmetic and if buying back the call and selling the stock yields greater than waiting to be assigned, then so be it. I have not done the arithmetic yet as I paper traded these first two.
I am not an experienced option trader, but that makes sense to me.
So when you say, “we’ll be called out”, does that mean I do nothing proactive…just wait to be told I’ve sold, or bought, as the case may be? Or do I have to inititate action – i.e., notify my broker – to realize the net?
William – If you do nothing and the option is in the money on expiration day, you will (almost assuredly) be assigned. That scenario requires no action by you.
Here’s what’s happened so far… You received the option premium in cash on the day you sold the covered call.
If you do nothing, and are assigned at expiration (sometime after noon Saturday, the 22nd, and before the next Monday market open… Your broker will sell your stock to the option buyer, and you’ll get 100 x the strike price in cash.
Another option is that you can buy back the call if you want, today, or any day before expiration. That may make sense if you factor in the commission costs of buying back the call vs. being assigned.
So if I understand this correctly: I bought 100 shares BAC at 12.50 and its now trading at 14.50 giving me a potential $200 profit. I sold the covered call at the 12.50 strike price and got around $50.
If I wait and let it get assigned, I will get my 12.50 for a hundred shares back.
If I think BAC is going to continue, its possible to just get rid of the covered call by ‘Buying to Close’ a BAC Jan 12.50 call which is at $2.00. The $200 for the call negates the $200 upside on the stock. So basically it a wash at this point with me being ahead $50.
Yes, the trade on BAC was to do a buy-write of the Jan 12.50’s with a net debit of 12.02. If you get assigned, you make $0.48 per share, which = 3.99% return in a month, multiply by 12 for a hypothetical annualized return.
If you are ahead by $0.50 per share right now, you have reached the maximum return the strategy will provide you. But according to my quotes, you could sell the stock right now at 14.27 and you’d pay 1.83 to buy back the call, so you aren’t going to make $0.50, or the strategy’s maximum profit of $0.48. Instead, you’d make $0.42.
Only you know if making 87.5% of your possible return today is better than 100% two weeks from now, but giving up 12.5% of what I expected/hoped to make isn’t a wash to me.
Can anyone tell me how do you manage the tax implication of options gain-loss , do we fill out schedule-Ds in terms of the number of stock or per ccontract ?
Tax Reporting Calls–If they expire unexercised and you were long, then you have a capital loss with sales price $0 and cost of whatever you paid. Show on Sch D. If you exercised your Long call, then the call cost per share is added to the purchase price of the excercised stock. If you were short the call and it expired unexercised, then your sales price is what you wer paid when you entered the transaction and the cost is $0, and you report a capital gain on Sch D. For Ex: 10 CAT Feb 19, 2011 Call Expired, date acq 1/15/2011; date sold 2/19/2011; Sales Proceeds $1,500; Cost of Sale $0; Short Term Capital Gain $1,500. (Ignores commission which you would/could show as Sales Proceeds $1,490.)
My biggest struggle with options is not being sure what to do (and when) if my original thesis proves wrong. In the case of BAC, the assumption was that the stock will continue to go down. However, the sentiment for the past couple of weeks has been that financials will go up. So, in hind sight, it would have done much better (~15% gain) just buying the stock. In such situations, I’m confused about when to buy back the call or whether to just wait until expiration or whether to roll the option to a higher strike price (and when).
Naresh, you don’t buy back the call, You just wait till expiration, get called out and congratulate yourself on having made the maximum that you set out to do on that trade. Yes you would have made more if you’d bought the stock or a call option but that’s being greedy. Woulda shoulda coulda. With this trade you set out to make about 3% on your money and that’s what you did. Now you can do it again next month.
Why would you not just do the arithmetic and if buying back the call and selling the stock yields greater than waiting to be assigned, then so be it. I have not done the arithmetic yet as I paper traded these first two.
I am not an experienced option trader, but that makes sense to me.
So when you say, “we’ll be called out”, does that mean I do nothing proactive…just wait to be told I’ve sold, or bought, as the case may be? Or do I have to inititate action – i.e., notify my broker – to realize the net?
William – If you do nothing and the option is in the money on expiration day, you will (almost assuredly) be assigned. That scenario requires no action by you.
Here’s what’s happened so far… You received the option premium in cash on the day you sold the covered call.
If you do nothing, and are assigned at expiration (sometime after noon Saturday, the 22nd, and before the next Monday market open… Your broker will sell your stock to the option buyer, and you’ll get 100 x the strike price in cash.
Another option is that you can buy back the call if you want, today, or any day before expiration. That may make sense if you factor in the commission costs of buying back the call vs. being assigned.
So if I understand this correctly: I bought 100 shares BAC at 12.50 and its now trading at 14.50 giving me a potential $200 profit. I sold the covered call at the 12.50 strike price and got around $50.
If I wait and let it get assigned, I will get my 12.50 for a hundred shares back.
If I think BAC is going to continue, its possible to just get rid of the covered call by ‘Buying to Close’ a BAC Jan 12.50 call which is at $2.00. The $200 for the call negates the $200 upside on the stock. So basically it a wash at this point with me being ahead $50.
Yes, the trade on BAC was to do a buy-write of the Jan 12.50’s with a net debit of 12.02. If you get assigned, you make $0.48 per share, which = 3.99% return in a month, multiply by 12 for a hypothetical annualized return.
If you are ahead by $0.50 per share right now, you have reached the maximum return the strategy will provide you. But according to my quotes, you could sell the stock right now at 14.27 and you’d pay 1.83 to buy back the call, so you aren’t going to make $0.50, or the strategy’s maximum profit of $0.48. Instead, you’d make $0.42.
Only you know if making 87.5% of your possible return today is better than 100% two weeks from now, but giving up 12.5% of what I expected/hoped to make isn’t a wash to me.
and by ‘reached the maximum return the strategy will provide’, I meant exceed
Can anyone tell me how do you manage the tax implication of options gain-loss , do we fill out schedule-Ds in terms of the number of stock or per ccontract ?
CALL OPTIONS
Tax Reporting Calls–If they expire unexercised and you were long, then you have a capital loss with sales price $0 and cost of whatever you paid. Show on Sch D. If you exercised your Long call, then the call cost per share is added to the purchase price of the excercised stock. If you were short the call and it expired unexercised, then your sales price is what you wer paid when you entered the transaction and the cost is $0, and you report a capital gain on Sch D. For Ex: 10 CAT Feb 19, 2011 Call Expired, date acq 1/15/2011; date sold 2/19/2011; Sales Proceeds $1,500; Cost of Sale $0; Short Term Capital Gain $1,500. (Ignores commission which you would/could show as Sales Proceeds $1,490.)