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Say you want to do a short call against a strike price of k, on 100 shares on a stock. Let's say the current price is c.
My question is: when you want to actually execute this call on a real platform, do you need to provide proof that you actually have 100 shares of the stock on you? If not, how does the exchange guarantee that you will be able to give your long trading pair their 100 shares when they exercise their right to buy them at a price of k?
In order to sell a covered call against 100 shares, you need Level 1 option approval. If you have Level 1 option approval and you try to sell the call without owning 100 shares, the broker's platform will prevent you from doing so.
In order to sell a naked call without owning the shares, you need a margin account, Level 4 or 5 option approval (some brokers have 4 levels, others 5), and sufficient margin to support the position.
The mechanics of assignment and exercise are handled as well as guaranteed by the Option Clearing Corp.
0.001k. And now I do a short call with those shares, just like in the question. Per my understanding, I should be on a profit no matter what happens. If the price increases, the longer trading pair will exercises his right and buy them at k, giving me a huge profit
If the price decreases, then I'm making money off the premium and still retain the shares. So not losing anything. Covered calls have an asymmetric risk/reward. In return for a small premium, you bear all of the risk of the stock dropping so it is quite possible that you can lose something and that something could be large.
Jan 21, 2021 at 23:31