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Jumping into this thread with a question
Does anyone ever exercise their call options to buy the underlying stock? In other words, are there circumstances where it would make sense to do so?
Specifically, I want to add more to my TSLA holding, but now doesn't look like I would get any good entry point. Back around end of October, I purchased call options with range of strike prices and expiration dates. My goal was to try make some profit when the stock rises after Q4 P&D report, which then I would turn around and invest in the TSLA stock when stock drops in 1Q with the usual FUD. Never in my wildest expectations did I expect the stock to go up by $150 since I purchased the options. So now, my options are nicely in the money and over the strike prices. I just sold Jan17 $385 options at $95 that I purchased at ~$7! I still have March $410s which have gone up over 500% since the purchase.
But my long term strategy is buy and hold - I believe long term TSLA promise. So I am wondering if I can just buy the underlying stock for the March $410 options. I have enough cash in the account to buy about half of them at $410. Or is it a better strategy to sell all the options and use the $$ to buy the stock at market price?
Edit - all these transactions are in an IRA account, so taxes are not a concern
Does anyone ever exercise their call options to buy the underlying stock? In other words, are there circumstances where it would make sense to do so?
Specifically, I want to add more to my TSLA holding, but now doesn't look like I would get any good entry point. Back around end of October, I purchased call options with range of strike prices and expiration dates. My goal was to try make some profit when the stock rises after Q4 P&D report, which then I would turn around and invest in the TSLA stock when stock drops in 1Q with the usual FUD. Never in my wildest expectations did I expect the stock to go up by $150 since I purchased the options. So now, my options are nicely in the money and over the strike prices. I just sold Jan17 $385 options at $95 that I purchased at ~$7! I still have March $410s which have gone up over 500% since the purchase.
But my long term strategy is buy and hold - I believe long term TSLA promise. So I am wondering if I can just buy the underlying stock for the March $410 options. I have enough cash in the account to buy about half of them at $410. Or is it a better strategy to sell all the options and use the $$ to buy the stock at market price?
Edit - all these transactions are in an IRA account, so taxes are not a concern
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The only instance I can think of was a bit unusual. It was in early 2014 (I can date it because I was at a conference that runs every 3 years at the same location, and I'm at it now...) but I can't remember what the trigger was. Basically some incorrect information came out before trading hours that caused a nice bump in stock price that I was pretty sure would be corrected before opening. I didn't want to sell my core stock, but I had some options that were in the money. Now you can't sell the options in pre-market, but you can call the broker, exercise the options, and sell the stock.
Usually the time value makes it more sensible to just sell the options. Time value disappears in two cases:
1. Very close to expiry, or
2. Strike is very deep in the money. I wouldn't call 410 strike "deep" though... there is still time value.
I've got two 500 June 2020s and one 530 January 2021. So far they've netted me ~15k, which is rather a lot for me. I had been thinking I'd hold them until at least after the Q4 earnings, and maybe through battery investor day (depending on when that happens), but I'm getting antsy looking at those unrealized gains, and I'm starting to wonder if I should just convert them (or some of them, say the Junes) to shares ASAP.
Anyone have thoughts as to what they'd do in my shoes?
Thanks!
Anyone have thoughts as to what they'd do in my shoes?
Thanks!
A question of my own that I can't seem to find the answer to:
I have 2 deep in the money LEAP (well, Jan 2021) options. Can you sell a covered call with those options covering it? I was thinking of selling the LEAPs, but then wondered if I could sell covered calls against them instead. Ameritrade doesn't seem to have any answers on that in their online docs, at least not that I've been able to find yet. Everything on covered calls that I can find talks about them backed by actual stock, not a call option.
I have 2 deep in the money LEAP (well, Jan 2021) options. Can you sell a covered call with those options covering it? I was thinking of selling the LEAPs, but then wondered if I could sell covered calls against them instead. Ameritrade doesn't seem to have any answers on that in their online docs, at least not that I've been able to find yet. Everything on covered calls that I can find talks about them backed by actual stock, not a call option.
Let's take Jan 15 '21 calls as an example.
TSLA closed at $492.14, but for sake of clarity let's pretend it closed at exactly $490.
The last trade for $490 calls was at $93.24. Clearly the time value of those calls is $93.24.
$410 calls (for next January, not your example) traded at 138.71. $80 of that is intrinsic value (that is, difference between strike and current) so the time value is still $58.71. Less, but still non-trivial.
$300 calls were $209.59. Still time value of $19.59.
The point of buying DITM calls is to get extra leverage. Suppose you want 2x leverage, that is, for every $1 TSLA goes up, you want the calls to be $2 profit. So if there was no time value at all, you want to buy at half the current price, that is, $245 strike. Well, even $245 strike has some time value. Note: no $245 calls traded today. Bid:254.95, so the time value is at least 9.95. This is about where I would consider them to be truly DITM; you get your factor of two leverage for only a couple of percent premium, which is comparable to the interest charged on a margin loan.
I think I understand this now - It is more advantageous to just sell the options and then buy shares with the proceeds than to exercise options.
Working this out for my example for 3 options at strike price of 410
Current stock price - 490
Last trade for 20Mar'20 @410 call options - 101
Time value is 101 - 80 = 21
- If I sell all three options and buy stock at current market price = (101 X 300)/490 = 61.8 shares
- If I sell 2 options and exercise the 3rd option at strike price of 410 = (101 X 200)/410 = 49 shares (I am guessing that the trade value of the 3rd option is null if exercised?)
Does this make sense?
A followup. Does a call covered by options work the same way as stock? With stock, they could exercise and I lose the stock. That's pretty clear. With my own DITM call option covering my "sell to open" OTM call option, how does that work if exercised? Do they pick one of the 3 different DITM call to sell for me?
Or, did they just let me sell that call option because I had sufficient account value to cover it and there I'll need to manually handle selling my DITM call to cover the sold call?
I don't actually know the answer, but my guess is that they exercise the call on your behalf to deliver the stock. A nice broker might consult with you first...
At Fidelity and Schwab, level 1 options trading permission allows for share covered short calls, level 2 allows long call covered short calls.
Every broker is different but you'll be able to tell if they treat your covered calls and long leaps as "1 product" if the margin requirements to sell the calls is nothing. If the margin requirements are high than they probably dont considered them "covered."
As for the questions about does it ever make sense to exercise instead of just selling the call, then buying stock, another reason 1 might exercise is to avoid short term capital gains taxes or to push the tax burden out to another year. Example: If I own 10x 100 strike calls that are about to expire, if I sell them all now I would be looking at 400k of capital gains in a single tax year. But if I sell half and exercise the other half I would only owe taxes on 200k, and could then sell the shares off in future years as I see fit.
As for the questions about does it ever make sense to exercise instead of just selling the call, then buying stock, another reason 1 might exercise is to avoid short term capital gains taxes or to push the tax burden out to another year. Example: If I own 10x 100 strike calls that are about to expire, if I sell them all now I would be looking at 400k of capital gains in a single tax year. But if I sell half and exercise the other half I would only owe taxes on 200k, and could then sell the shares off in future years as I see fit.
So, I had what I thought was an epiphany this morning.
Thanks to options, looks like I'm likely to get around $100k to play with in my trading account, slightly up from the $3k I started with
I was thinking how to grow this quickly and came to the following strategy:
- every week - likely Friday, sell a covered put (just 1x100) slightly below the trading range for the following week = pocket the premium
- using Opricot as a guide, most of the time the option will expire worth less
- if it is exercised, I buy the stock, then sell a covered call with similar parameters = pocket the premium
- when exercised, switch back to put
Seems foolproof to me? I cannot lose.
Convince me I'm wrong...
Thanks to options, looks like I'm likely to get around $100k to play with in my trading account, slightly up from the $3k I started with
I was thinking how to grow this quickly and came to the following strategy:
- every week - likely Friday, sell a covered put (just 1x100) slightly below the trading range for the following week = pocket the premium
- using Opricot as a guide, most of the time the option will expire worth less
- if it is exercised, I buy the stock, then sell a covered call with similar parameters = pocket the premium
- when exercised, switch back to put
Seems foolproof to me? I cannot lose.
Convince me I'm wrong...
So, I had what I thought was an epiphany this morning.
Thanks to options, looks like I'm likely to get around $100k to play with in my trading account, slightly up from the $3k I started with
I was thinking how to grow this quickly and came to the following strategy:
- every week - likely Friday, sell a covered put (just 1x100) slightly below the trading range for the following week = pocket the premium
- using Opricot as a guide, most of the time the option will expire worth less
- if it is exercised, I buy the stock, then sell a covered call with similar parameters = pocket the premium
- when exercised, switch back to put
Seems foolproof to me? I cannot lose.
Convince me I'm wrong...
Assuming all of us at TMC are not wrong about TSLA being worth more than it is now in the future, you cannot go wrong with this strategy. If stock tanks for a while, you could be 'bagholding' for a while, but you will profit in the end.
The only risk (besides the TSLA bull thesis being incorrect) is that the profits from this strategy might not net you as much as other strategies. If the stock goes on a large run up like it has in the past few months, you would've made nothing with this strategy compared to what you would've made simply holding the stock, let alone made if you were holding the stock and holding some % of (long term) call options.
So, assuming we're not wrong on the TSLA bull thesis, your strategy is guaranteed to make money. But the real question is whether it will make as much money as simply holding stock and/or other trading strategies.
I have been doing a similar strategy on AAPL and TSLA for many years now. you may find you don't make as much as buying and holding over the long term. Taxes also need to be considered.So, I had what I thought was an epiphany this morning.
Thanks to options, looks like I'm likely to get around $100k to play with in my trading account, slightly up from the $3k I started with
I was thinking how to grow this quickly and came to the following strategy:
- every week - likely Friday, sell a covered put (just 1x100) slightly below the trading range for the following week = pocket the premium
- using Opricot as a guide, most of the time the option will expire worth less
- if it is exercised, I buy the stock, then sell a covered call with similar parameters = pocket the premium
- when exercised, switch back to put
Seems foolproof to me? I cannot lose.
Convince me I'm wrong...
Well I have a lot more shares in my core account, so in case of any bull-run (or just a continuation of the current), I'm making there, so fomo isn't too bad. If I get left bag-holding (which I do in my other account anyway), then I'll make on the way down with selling calls.
10% tax on profits as it's in my trading company account, so no big deal. As someone said in the main forum yesterday "I love paying capital gains taxes" - it's a sign of profits
I could transfer it to my personal account and do it there though, that's tax free...
jeewee3000
Active Member
As long as your total trading portfolio (on all your accounts combined) does not exceed 500.000 EUR.
I'm not there yet, but reading your posts I think you might be.
Johann Koeber
Happy Owner
With this strategy you will profit most of the time, but loose out in the rare cases.
A short put has the same payout as a covered call. If the underlying goes up too fast you loose by not profiting enough. If it drops quickly the option premium will not offset the loss.
Key to this strategy is how you select the strike price, how long out the options are and what your plan is to exit the trade.
Example that has worked well for me:
Use weekly options; choose the strike with a delta of 0.10. Close position when it has earned 50% of the premium.
Do your own research and find out what kind of risk you are comfortable with. (Short Version: not advice)
A short put has the same payout as a covered call. If the underlying goes up too fast you loose by not profiting enough. If it drops quickly the option premium will not offset the loss.
Key to this strategy is how you select the strike price, how long out the options are and what your plan is to exit the trade.
Example that has worked well for me:
Use weekly options; choose the strike with a delta of 0.10. Close position when it has earned 50% of the premium.
Do your own research and find out what kind of risk you are comfortable with. (Short Version: not advice)
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