1

I own shares of stocks and ETFs that I plan to own for the long term (so as to avoid the short term capital gains tax).

I also want to sell call options on these shares.

I understand that the buyer of my options can exercise early and can even exercise when the options are out of the money.

Problem:

Whenever the call buyer exercises its right, I will have to sell my shares.

How can I avoid selling my shares?

If I always close out the positions on the Friday before expiration, would I be able to achieve this outcome?

3

Yes, the owner can exercise his call early but that is very unlikely unless the call has very little time premium remaining and that occurs either very close to expiration or the call is very deep in-the-money.

It is very unlikely that a call owner will exercise an out-of-the-money call because that would mean that he would be paying more for your shares (the strike price) than he could pay on the open market. Secondarily, he would also be throwing away his remaining time premium.

You can proactively reduce your chance of early assignment if you buy back or roll your short calls before your short call goes in-the-money but there is nothing you can do to avoid selling your shares if your short call is assigned. Your shares will be gone.

0

When you sell a call option you either need a margin agreement with your broker sufficient to cover the assigned stock or you hold the applicable shares and they are collateral to the option. In your situation, your shares are the collateral.

So if you don't want your shares to be assigned you either need to buy back the option while it's out of the money or get the option approval to cover your collateral requirement with margin from your broker.

I'm going to add a bit to avoid spending the rest of my life in the comments.

I asked myself this same question a while back because I was curious to generate some revenue from my existing holdings but one such holding has a gain of 3,000%, so any assignment would generate a tax bill. Since I otherwise had no desire to sell the stock, the answer is don't sell a call on that stock, because the alternative was get approval from my broker to sell naked options and open a margin line using a bunch of other assets as collateral and open myself to way more risk than the potential tax bill.

When you sell a call, you are selling the right to buy a stock. Which means you NEED to be able to produce the shares related to the contract. You, the seller, make money if the stock doesn't rise above your strike price. If the stock does rise above your strike price, your stock is sold at the strike price, which is below the current market price, that spread represents lost income to you.

The issue with, and why you should never, sell a call option naked (without owning the stock already) is because, as with selling a stock short, your risk is unlimited. Say for example you have 100 shares of XYZ which is trading for $22. You sell a call option with a strike of $25. The price rises to $27, and your stock is assigned so you sell at $25, missing out on that additional $2. If you didn't already own XYZ stock, you would have to buy 100 shares at $27, then sell them for $25, now rather than missing out on $2, you have a loss of $2.

Imagine in some crazy twist of fate you sold a call naked on XYZ and the price of XYZ jumps to $5,000 per share. Assuming your broker hasn't called your margin and stopped the madness, now you'd have to go to the market and buy 100 shares for $500,000 to sell them for $2,500 for a loss of $497,500. If you were covered by shares you already owned, your risk is limited to the price you already paid for the 100 shares, not the current market price.

No one, ever, would ever, ever, choose the above possibility over just letting their shares get assigned. If you don't want your shares to be assigned, don't write calls against your shares. And DEFINITELY, don't sell naked calls, or open naked short positions because you can lose up to infinity dollars. The market can go up to infinity but only down to zero.

8
  • What does it mean to get the option approval to cover your collateral requirement with margin from your broker? If he is assigned, his shares are gone. – Bob Baerker Jan 2 at 3:47
  • Sell the call naked with margin rather than covering with your shares. Then if you get assigned money is gone rather than shares. The ability to sell a naked call would require approval from the broker and the applicable margin agreement, and possibly a separate account. – quid Jan 2 at 4:40
  • If it's a covered call and it is assigned, the shares are gone. Your idea could only be accomplished with in a separate account. But what would that achieve? He'd be long shares in one account and short shares in another account which is Short Against The Box with no potential gain or loss. Though small details, he'd also have to pay a borrow cost on the short shares, incur addition B/A slippage and additional commissions if he's still paying them, and tie up cash for the margin requirement unless he has other marginable securities in the second account. It doesn't make sense to me. – Bob Baerker Jan 2 at 5:18
  • Probably has a large taxable gain in the shares which would be recognized if they're assigned and trying to use selling options as an income source. And I'm not offering an opinion as to whether any of this is a good idea, didn't come up with the idea, the question asks 'how can I sell call options but not have my shares of the underlying stock assigned' sell them naked and possibly in a separate account or buy back before your shares get assigned. – quid Jan 2 at 6:33
  • Once he goes Short Against The Box (SATB), it's dead money and secondarily, it costs him maintenance money. The plan to own for the long term is gone as is ability to sell calls as an income source. As for And I'm not offering an opinion as to whether any of this is a good idea, didn't come up with the idea, I'm telling you that it's not a good idea. There's no benefit whatsoever unless maybe the OP wants to keep the SATB position open for years and close a portion of it each year to distribute the taxes on his large taxable gain. And that's still a long stretch as to being a good idea. – Bob Baerker Jan 2 at 13:48

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.