1

If i buy 1 call option and then sell 1 call option. Is that classified as covered? I don't actually own the shares, i just own an option to buy them. Robinhood allows me to do this even though i dont have the cash to actually buy the real shares should both options end up in the money at expiration.

Would i need to buy and sell actual 100 shares or does Robinhood do that technically on a margin?

I ask because i was allowed to sell a call option because i had bought a call option (not the shares), but if both options were exercised I don't have the cash flow to buy the actual shares and then sell them for the profit so how does that work?

Can you sell a call option using another call option as collateral instead of actually owning 100 shares?

3

When you write (sell) an option, you must be covered or you must put up margin. For margin purposes, covered means that you:

Own the underlying stock

Own a call with same or lower strike price with the same or longer expiration

Long a security convertible into the underlying stock

Long a warrant with a lower exercise price than the call’s exercise price

Long an Escrow Receipt or Depository Receipt

Some common examples of a short call being covered would be long a Calendar, Diagonal or Vertical spread. In your example, if the call sold was at a lower strike than the call bought, it would not be covered and the margin required would be the difference in strikes less the premium received. Conversely, if the call sold was at a higher strike than the call bought, it would be covered, there would be no margin and you would only have to put up the cost of the spread. For a synthetic, this is a technicality in definition rather than a risk differential.

If Robinhood is allowing you to open this position then the assumption would be there should be no problem with it. However, assumptions can get you into trouble so you should contact Robinhood find out how they handle such situations.

If this is a bullish vertical spread and both calls are in-the-money, you should be looking to close out the position since you are approaching the maximum gain. Trying to squeeze out the last dime or so often costs a lot more if the underlying reverses. Any decent platform will offer combination orders. I don't know how bare bones the RH platform is but if they offer combo orders, use a spread order to facilitate getting the best exit price.

  • 'Own a call with same or lower strike price with the same or longer expiration' explains my situation exactly. Is there a term for when you are covered like this and not covered by the physical ownership of the actual stocks? So i am 'technically' covered as i could buy the long call stocks. But in reality I'm not covered because i wouldn't have the cash to buy the long stocks in order then turn around and sell them if i was assigned to. I would need the brokerage to do the buying and selling. Is that something brokerages do? – cwc1983 Aug 14 '18 at 18:33
  • Is there a link or citation for the quoted text (following "For margin purposes, covered means..."?) – unutbu Aug 14 '18 at 20:16
  • 1
    You can find the explanation in Series 7 exam study materials (which you're not likely to find easily). You can look around the Investopedia web site. It has been many years but I have seen the info I posted in both locations. – Bob Baerker Aug 14 '18 at 22:50

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.