0

There has been a lot of discussion about selling a call option. I read a good number of explanations but I didn't get clarity on this.

Let's say a stock is trading at $80 per share and I sell a Feb 28th call with a strike price of $84 for a premium of $150.

If the stock price goes to $90, I have the obligation to sell it at $84. What if the stock price goes to $75? Do I have the obligation to sell it at $75 or does it get auto sold at $84 even though the stock price is at $75?

I understand that in both cases, I get to keep the premium received.

1

The owner of your short call has the right to buy this stock at $84. If the stock has dropped to $75, it would make no sense for him to do so since he can buy it for $9 less on the open market. The call will expire worthless and you will continue to own the stock but at a loss of $3.50 due to the $5 drop from $80 to $75 less the $1.50 premium received.

What you refer to as "Auto sold" only occurs at expiration. In the US, if an option is one cent or more in-the-money (ITM) at expiration, the Option Clearing Corp (OCC) will automatically exercise options whether they are long or short. This is called Exercise by Exception. For equity options, you will end up with a long or short position in the underlying (index options are cash settled).

If you are long the option, you can designate to the OCC via your broker that it is not auto exercised at expiration. This would make sense if it is ITM by pennies and your commission and/or fees to close the position exceeds the ITM amount.

|improve this answer|||||
  • thanks @bob. so in my above example, the Exercise by Exception would be executed and my stock will be sold at $75 even though i kept the strike price at $84 on the day of option expiration at 4 pm? which basically is a loss to me. – user1447718 Feb 18 at 18:04
  • @user1447718 - $75 is the market price of the security. $84 is the contract price of the call you sold. If the stock is above $84 at expiration, your $84 expiring call is in-the-money and it will be automatically exercised by the OCC. You will receive the assignment notice, informing you that you have sold you stock at $84, per the terms of the call. At $75, the call expires and your stock is worth $75. If you bought it at $80, you have a loss of $5 on the stock less the $1.50 received from selling the call. – Bob Baerker Feb 18 at 18:14
  • hi Bob, one question is, lets say the price is $75 now any my option has expired. No one would want to buy my option correct, because it has a strike price of $84. so in that case will my 100 stocks be sold at $75 or will it be sold at $84 or will i get to keep that 100 stocks? – user1447718 Feb 19 at 22:03
  • @user1447718 - If an option contract expires, it ceases to exist. One cannot buy what doesn't exist. Your stock is worth $75 and you have earned the premium from the call that you sold. You are now free to sell the stock or if so inclined, you can sell another covered call. – Bob Baerker Feb 19 at 22:07
  • My bad, let me ask other way. On the day of expiry, what will happen if the stock price is $75? My strike price was $84. Will the stock be sold or will I be keeping it? – user1447718 Feb 20 at 3:52

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.