Covered call when stock position is at a loss

Question

when writing covered calls and the stock value decreases. Sure your calls decrease to $0 and expire worthless (the desired scenario) but your stock position can continue taking a greater loss.

so consider this scenario: You bought 100 shares at $50, and sold 1 at the money call at strike $50

Stock price decreases to $43 , call will expire worthless but it may not be expiration day, so thats great.

Write new covered call at the money at $43 (same expiration date or next expiration date out)

Stock price increases to $45 and you get assigned.

Since you delivered shares at $50, which were taking a loss and delivered shares at $43 while the stock was still at a loss from the entry position

is this a loss or does the time premium collected continue to make up for this scenario? I'm having trouble calculating this series

can I deliver shares at that assigned strike using margin or additional capital if I have it? Can the broker just take care of it and let me collect the time premium? Not sure what happens here, never been assigned.

Answer 1

It's unclear what you're asking. When I originally read your question, it seemed that you had closed out one options position and opened another. When I read your question the second time, it seemed that you were writing a second option while the first was still open.

In the second case, you have one covered and one naked position. The covered call will expire worthless, the naked call will expire in the money. How your broker will resolve that is a question best left for them, but my expectation is that they will assign the non-worthless calls. Whereas, if both options expired in the money, you would be assigned and you would have to come up with the additional shares (and again, that depends on how your broker works).

In general, for both cases, your net is the premiums you received, plus the difference between strike price and the price that you paid for the stock, minus any cost to close out the position. So whether you make a profit is very much dependent on how much you received for your premiums.

Scenario #1: close first call, write second:

- 5000 = Original stock price: $50
+  200 = Received premium of $2 for ATM C50
-   25 = Paid premium of $0.25 to close C50
+  400 = Received premium of $4 for C40 when stock is at 43
+ 4000 = Received when options are assigned
-    ? = Commissions on 5 trades

Scenario #2: write covered + naked, one expires worthless

- 5000 = Original stock price: $50
+  200 = Received premium of $2 for ATM C50
+  400 = Received premium of $4 for C40 when stock is at 43
+ 4000 = Received when options are assigned
-    ? = Commissions on 4 trades

Scenario #3: write covered + naked, both expire in the money

- 5000 = Original stock price: $50
+  200 = Received premium of $2 for ATM C50
+  400 = Received premium of $4 for C40 when stock is at 43
+ 5000 = Received for C50 when options are assigned
+ 4000 = Received for C40 when options are assigned
- 5500 = Paid for stock to cover naked options; stock is now at $55
-    ? = Commissions on 6 trades
-    ? = Margin interest if you don't have cash/stock to cover C40

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Disclaimer: the SEC does not consider me a financial/investment advisor, so this is not financial/investment advice

Answer 2

If your shares get called on stock at a price below what you paid for the stock, your gain or loss depends on what premium you got for the options you sold.

"can I deliver shares at that assigned strike using margin or additional capital if I have it? Can the broker just take care of it and let me collect the time premium? "

You don't need margin or any cash because you already hold the shares. A covered call means your cash requirements are 'covered'. So they'll just buy your shares at the strike price of $50. And you still get to keep the premium (which you should have gotten when you sold the covered call).

You only need cash or margin when you've sold an uncovered call or put.

Answer 3

An expired option is a stand-alone event, sold at $X, with a bought at $0 on the expiration date.

The way you phrased the question is ambiguous, as 'decrease toward zero' is not quite the same as expiring worthless, you'd need to buy it at the near-zero price to then sell another covered call at a lower strike.

Edit - If you entered the covered call sale properly, you find that an in-the-money option results in a sale of the shares at expiration. When entered incorrectly, there are two possibilities, the broker buys the option back at the market close, or you wake up Sunday morning (the options 'paperwork' clears on Saturday after expiration) finding yourself owning a short position, right next to the long. A call, and perhaps a fee, are required to zero it out. As you describe it, there are still two transactions to report, the option at $50 strike that you bought and sold, the other a stock transaction that has a sale price of the strike plus option premium collected.