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A bit of history: I worked at a company that granted me a bunch of META shares. So my initial cost for these shares is $0. I have never actually traded options before in my life. I find myself in a position where a lot of money is at stake.

My (ex) financial advisor started writing covered calls on some of these META shares early '23 when META was trading at around $124. Since then the META has gone up and the calls just keep getting rolled up and out.

The last few months

  • 1/9/23 META = $129.47, sold 2/17 $130 call for $10.42
  • 2/7/23 META = $191.62, bought back $130 call for $61.99, sold 11/17 $140 call for $64.00
  • 11/3/23 META = $314.60, $140 call trading at $174.90, $145 call trading at $175.90 < trying to figure out what to do >

I fired my advisor for other reasons, and find that I currently am short the 11/17 $140 calls. The last email from them said they planned to roll these out on the 6/21 $145 call.

If I let them expire, then they'll get assigned and I miss out on $314 - 140 = $174 worth of gain. If I buy them back, they cost $174.90 as of this writing, but then I can sell the 6/21 $145 call for $175.90.

When I was looking at the options chain, I noticed that it was difficult to find options that could sell for > $175. These were all obvs deep in the money, and either 6 or 9 months out.

Obvs I don't want to lose the $174 difference between the current and strike prices on assignment. And I don't want to spend essentially the same amount to buy back the calls.

The goal of selling covered calls, I understand, is to let them expire worthless, or at the very least allow the shares to be assigned when they are only barely in the money, aka at a price at which I'm willing to let them go. At $140 or $145 strike I'm not willing to let go of these.

So the question is: can rolling up and out keep going on indefinitely? I find that each cycle involves more money at stake.

  • If META price increases, will I eventually find that there are no calls I can sell to cover the ones I just bought back?
  • If META price stabilizes and doesn't move for the next 10 years, will I eventually get back out of the money to be in a position when the calls expire worthless and I've lost (let's say) nothing?
  • If META price drops, will I be able to buy the calls back at the same price I sold them for or better? (I don't mind if the underlying drops; I assume META will eventually come back up over the long term).

What is the best strategy to get out of this? I just want to be back at a place where worst case I have some short calls that are only a little in the money, not deep in the money as they are now.

thanks

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  • You have 11/17 $140C and haven't been assigned yet? There's your answer.
    – findwindow
    Nov 6, 2023 at 14:05
  • LIke I said, I'm new to options. I've been reading like mad. However I'm unable to decipher your comment. What is the implication that the 140's haven't been assigned? I have been wondering that myself, only to read that most calls aren't assigned, or if they are it's at the last minute before expiration. Nov 6, 2023 at 20:01
  • I don't know what you're reading but it's not good because your comment suggests you understood none of it.
    – findwindow
    Nov 7, 2023 at 19:12
  • You were probably assigned. You have no idea.
    – findwindow
    Nov 7, 2023 at 19:19
  • They were not assigned. All the shares are still there. Why didn't the call owner exercise at 135 last week? Nov 8, 2023 at 20:17

1 Answer 1

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While it's tempting to think about the shares/money you lost and try to get them back, you really need to think of every new order as a new, separate decision.

Selling calls will earn you money if the underlying will not go up too much. So yes, trivially, "If META price stabilizes and doesn't move for the next 10 years", you can get back (some of) the money/stocks you lost by selling calls.

But if that doesn't happen, e.g. if the stock goes up more, you might lose even more money.

And you could also earn (some of) the money back if you invest the money you got from the call execution into something completely different. (Or you could just as well lose more money there too).

So, coming back to my initial sentence: generally, you should only sell a specific call if you would sell it even if nothing else had happened before. And since you are unfamiliar with options, you probably wouldn't sell options if nothing else had happened before, especially if there is a lot of money at stake. But if want to go into options, and your assumption is that meta is going sideways (and you don't have something else you prefer to invest in more), selling calls is a valid decision (but independent from what has happened before).

But to point out the obvious: if there were a guaranteed way to earn money with a specific option strategy, everyone would just do that. So there is no guarantee. You earn money if you predict correctly. You lose money if you don't.

But if that doesn't convince you (e.g. because you cannot shake the feeling that you made a loss), you might want to try a frame challenge:

You got the shares for 0$ (which might not be correct if you got them instead of a higer salary, but currently, you think of those shares as free). You sold them (by executing the call) at some price around $130 (plus minus the premiums you got and paid). That's the same result as if you had decided at that point that $130 is a good price and you had just sold the stock directly: you got $130 free money.

Of course, in hindsight, you could have gotten more if you had waited. But that's basically true for every stock trade ever made by anyone. If you sell at a price, and the price goes up afterwards, you should have waited. If you sell at a price, and the price goes down afterwards, the buyer should have waited.

Now regarding your comment, if you could, mathematically, keep the option chain going on. Note that this is very specific to the actual question you asked (and I didn't want to get into these details before, as my answer was basically "You should not dwell in what happened before", so those details wouldn't matter - but maybe they give you an idea what you would get into):

To get a higher premium to pay for the previous buy-to-close, you can either lower the strike price or make the option last longer (except for very weird scenarios with very high negative interest rates).

The limit will be a strike of $0 (and duration not being relevant for reasonable time frames), for which you should get the current stock price (minus spread and fees).

At this point, you lost, as you don't get any money anymore from the option being an option, e.g. no premium apart from the value of the underlying stock.In theory, you can only reach that points due to a) spread b) fees c) the stock price rising.

To limit a), you could check if it's worth to let the option get executed instead of buying them back (unless you do it with a profit cause the stock price is lower): as you pay more for buy-to-close than you get for the same sell-to-open, you lose on every iteration. Please compare buy and sell for same strike and duration (the effect gets stronger for longer durations) to get an idea how much it is. This forces you to lower the strike on every iteration (down to 0, where it ends). If you let it execute and then buy back at the stock market, you limit that effect to fees of buying the stock, which should be lower (which you should check, though).

The fees on the option itself become a problem the deeper you get in-the-money, as the premium (minus the strike difference) becomes lower. As long as the premium is higher than the fee, you will, if you have unlimited time, get even at some point. You will however get deeper in-the-money if the stock price rises c). In your assumption, this doesn't happen, but that is the risk in your strategy.

c) If the stock price rises between sell and buy (or execute), you lose value. For deep in-the-money options, the dependency (delta) is almost 1:1. Nevertheless, vice-versa, you would profit if the stock price declines between selling and closing the option. But you should be aware that, for deep in-the-money options, the movement is almost the same as if you would trade with the original stock - but with all the complications and fees that options bring with them.

So, again, make sure you understand what you would be getting into if you try running after the lost money/stocks.

So maybe, and that's the last frame challenge, just be happy that the remaining stocks more than doubled their value, and think about what price you would like to sell them at. Since the most likely way that you will get your stocks back (in your lifetime) by your option strategy is if the price drops (a lot), and you can buy them back at $130. But then your remaining stocks will have lost more than half of their current value. In hindsight, you will probably know what will have been best.

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  • Thank you. Yes I see your point. Each roll out is a separate decision. To frame this as "free money at $130" is clearly the way to go. So the question remains -- can this keep going on indefinitely? Or does there come a point mathematically where there is nothing in the option chain that I can sell-to-open at a higher price than the previous call's buy-to-close? Nov 5, 2023 at 20:14
  • @Sonicsmooth added some details. (But don't forget that my main point was that you should probably NOT do this, even though half the answer now consists of how you might implement it).
    – Solarflare
    Nov 5, 2023 at 23:19
  • Thanks for the great answer. Nov 6, 2023 at 20:11

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