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I own 100 shares of a stock and I would like to get into writing covered calls.

I'm just curious:

  • If I write a contract, do I immediately receive payment for it from my broker? Or do I have to wait for someone to buy it ?

  • And secondly, if the stock hits the strike price, do I immediately sell my shares, or does that happen only when the person decides to exercise?

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  • a general note: you don't receive payment for anything even at the time of transaction. you've entered a position, and you only gain equity as the premium of the option begins to decay, which takes time. so say you "sell an option for $2.00/share" three days before expiration. you don't get $200. you gain say $40 of that $200 the first day due to decay, and then $55 more the next day, and then $105 the final day. once the option expires worthless you've captured the full value of the premium and have gained $200. Aug 1 at 23:46
  • you either close the position (BTC) late in the trading day BMC on friday for a couple of cents ($198 gain) or you wait for the option to expire worthless ($200 gain). either way, you've had to wait about 3 days to get the full $200 from theta decay, you don't get the premium automatically at the time that you sold the option. people often misunderstand how this process of appreciation works when it comes to selling options. Aug 1 at 23:46
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If I write a contract, do I immediately receive payment for it from my broker? Or do I have to wait for someone to buy it ?

Well you don't "write a contract" unless someone is willing to buy it, but I think you mean "place an order to write". You get the premium when you sell the option, not when you place the order.

And secondly, if the stock hits the strike price, do I immediately sell my shares, or does that happen only when the person decides to exercise?

No - the strike price is the price at which the holder can buy the stock, they are not obligated to. Typically the holder of an option that hits the strike can make more by selling the option than by exercising it, so exercising before the expiry date, or "early exercise" is rare.

Since you're obviously new to options in general, here are some other tips:

  • When you sell a covered call, your net profit is limited to the premium you get from the option (plus whatever gain you have already). You are essentially giving up any profit if the stock goes above the strike in exchange for the upfront premium. Your downside is not limited (technically your loss it's limited to the value of the option, but there's no protection above that).
  • Look at the implied volatility of the option and compare it to options on other stocks. The higher the IV, the "more expensive" the option is. If you have a stock with a very low volatility, you won't get as much premium for your option, so you might look for strikes that have a high IV since that means you'll get more premium upfront (but also a higher risk of loss).
  • Like any investment, don't put in any more than you're willing to lose. And set reasonable stop-losses (e.g. max 10% loss) in case your option position turns against you. It's better to bite the bullet on a learning experience that watch it continue to fall hoping there's some way to turn it around that you don't know about.
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  • "your net profit is limited to the premium you get from the option (plus whatever gain you have already)" plus the difference between current price and strike price.
    – Hart CO
    Jul 30 at 19:58
  • A clearer explanation would be that the gain (or loss) for a covered call will be the strike price plus the premium received less the cost of the security. Jul 30 at 22:38
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If I write a contract, do I immediately receive payment for it from my broker? Or do I have to wait for someone to buy it ?

You haven't sold a call until someone buys it. You'll collect the premium when it is sold. Since you'll then be holding an obligation you won't see any immediate change to your P/L.

And secondly, if the stock hits the strike price, do I immediately sell my shares, or does that happen only when the person decides to exercise?

Only if the person decides to exercise. Usually this won't happen until expiration unless the option is deep ITM (in the money) or there's a dividend.

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  • I often read the statement that a deep ITM covered call might be exercised early by the owner because of a pending dividend yet I have not seen an explanation of why that would be more profitable (an arb) than selling the call to close. I get it for the ITM put (time premium less than the dividend). Can you provide one for the call? Jul 30 at 22:42
  • @BobBaerker Stock price will drop by the div amount so if you're long the call you don't get the div but you do lose value when the price drops due to div, so you exercise the call early to collect the div. If it's deep ITM there's little extrinsic value left and if there's poor liquidity then the bid-ask on the call could make selling worse than exercising early and selling the shares directly. I'm not sure why you'd exercise a long put early due to div, you'd want to collect the div before selling your shares.
    – Hart CO
    Jul 30 at 23:14
  • Hart CO - Yes, stock price will drop by the amount of the dividend so exercising the call to collect the dividend is a wash. If there's any time premium remaining, exercising throws it away. There's no arb in this or gain from exercising. The arb is available if the time premium of an ITM put is less than the amount of the dividend. Buy the stock and the put, exercise after ex-div, and receive the dividend on the Pay Date. Jul 31 at 2:39

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