Wednesday, May 11th, 2016

When the spot price decreases after I write a covered call is there a point at which I can nearly break even?

I’ve been looking at writing a covered call. If I do this and the low spot price I will be losing money because my stock is losing value. You still have the bonus of writing the llamada.Si I understand things correctly, the price of the option also will decrease during this time for two reasons: 1. the call will be more outside money2. the due date is aproximaEsto means you will be able to close the option for less money I received for writing the misma.Lo I’m wondering is if the option price always falls fast enough that you can close the option and sell actions before it has lost more than the premium I received from the option to write in the first lugar.Supongo this rarely happens, if ever, but am not sure and I’m looking for more of an explanation of how esto.He read that the equilibrium point esprecio stock – premium recibidaNo sure why I feel like there should be a balance point slightly above the cost of the option contained in too. Something comoprecio stock – premium received + price of the option actualEstoy sure this all sounds silly to anyone who understands things better but please bear with me “I’m trying to learn aquí.Voy to try to give an example of what I’m pensando.Supongamos the purchase price of the shares was $ 50 and premium is $ 5.Yo understand that when the stock price reaches $ 45 that the premium is lost. If this was the due date that has complete sense that this is the point of equilibrio.Sin however, is not yet due date, then it could cost $ 1 to close the sense that the equilibrium position would have been $ 46 . However, it would have cost $ 46 more to close the position. . . I’m guessing these numbers chase each other constantly. Is there any way specific situations traders know how are you to limit your losses? For example, if the trade purchase of $ 50 to $ 5 bonus was a real business, are there specific strategies that suggest the sale before the point balance to close the position rather than waiting until after the point of balance? I love to see the pros and cons of doing any of these and learn more about esto.Gracias!

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3 Responses to “When the spot price decreases after I write a covered call is there a point at which I can nearly break even?”
  1. Karen says:

    I see where you are going with your question, but in my experience there is no magic answer to where that break even point lies… in addition to the variable of the stock price movement and the variable of the amount of time that has passed between your selling the call and wanting to buy it back, you also have to remember that the volatility at any given point in time is going to have a huge impact on the option pricing, and that is really hard if not impossible to predict. One thing is for sure: a buy-write strategy is definitely something to learn more about, and if you try to learn by experience do it small first, and do it with very active contracts so that your bid/ask spread is minimal and you don’t get taken by the market makers. Good luck!

  2. zman492 says:

    < <>>

    You are correct, but there is also a third “thing” that can have a major impact on the price of an option. It is called “implied volatility” (IV) and is determined by the market.

    < <>>

    Usually that is true, but sometimes IV will spike and it would cost you more to close the call option.

    < <>>

    While it is not common, I would not call it rare either. Let me give an example. Assume an option expires on the 20th of the month and the company is releasing earnings after the bell on the 17th. On the 17th IV will be high because everyone knows that a surprise in the earnings could cause a big change in the stock price. However, if there is no surprise the stock may open down a little or even up little, while there is a large drop in the price of the call option. The option price will drop because it is now very unlikely that any event will have a big impact on the stock price prior to expiration.

    < << ... Are there any specific ways traders look at situations like these to limit their losses?>>>

    Option traders often use “the greeks” (delta, gamma, theta, vega and rho) to monitor and adjust their positions. If you want to learn more about the greeks I suggest you read “Option Volatility & Pricing” by Sheldon Natenberg.

    Another thing you might want to do is to dowload the free “Options Toolbox” from the CBOE site at

    http://www.cboe.com/LearnCenter/Software.aspx

    The “Simulated Position Analysis” will allow to you see how changes in time, price and IV impact the price of the covered call. It is a bit of a pain to use, but the price is right.

  3. MikeS says:

    Covered call writers calculate their ‘net debit’, or break even point, by taking the price they paid for the underlying and subtracting what they got for the option they sold. When the option expires if the underlying is less than the net debit then you’ve lost money (unrealized until you sell the underlying). You can then sell another option for the next cycle to lower your net debit.
    There is a good covered call screener here: http://www.borntosell.com that will help you find deep in the money covered calls (which have lots of downside protection and still some decent annualized returns).

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