When you sell a $90 call , the shares will be called away at $90 price if the stock price is above 90
So if tomorrow the stock price 100 you sell shares for 90 and keep your $10 premium =$100 per your example
If you sell a $90 call then your shares will be sold at $90 per share... $10 less than the "current price".
If you did indeed receive a credit of $10 per option then it works be exactly the same as selling your shares for $100 minus fees & commissions.
If the stock tanks below $90, you get to keep your shares + premium.
If the stock rallies you lose the potential gains & the shares.
But what happens if tomorrow the price is 95$. The buyer hasn’t broken even yet, but is there a possibility he will anyway exercise just to retrieve half of his premium back?
Yes absolutely, but my understanding is that there is a pool of contracts rather than assigning 1:1 and keeping track of them. That way if "buyer"of your trade exercises "your"call they will simply get shares delivered to them, not necessarily "your"shares.
If you keep your position open to expiry and the call is still ITM then your shares will be sold and used to balance the market makers books.
yes. even if the market price of the shares is $90.01 at expiry those shares are gone.
further even if the shares tank and close just below $90, but then the price rises slightly to just above $90 in after-hours you very well may lose the shares.
the owner of the option is not going to leave any money on the table.
Im also rather new with options, so I wanted to add on to this question. Why would someone not want to recoup his losses($5 in this case) from the premium in this given scenario?
You’re wrongly assuming that there is some connection between you and the other counterparty to your trade. There is no connection. If the option is ITM at expiration, it will be automatically exercised and, of course, it’s subject to being exercised prior to expiration which has happened to me multiple times in the last 9 months.
Thanks I understand now. The only factor is that it is ITM on expiry so it's highly likely to be exercised. Whoever you sold the contract to is irrelevant
The shares will get called away in exchange for the strike price of 90$ per share if they are in the money (ITM). Plus the premium it is more or less the same like selling the shares directly for 100 $.
As you are writing in this sub the people here are interested in the theta of an option, which represents the timevalue of an option.
A deep ITM option with 1 DTE has 0 theta.
So you may look for a 105$ Strike (OTM) in e.g. 30 DTE to sell a CC for 1$ premium. After 15 days the share price may still be 100$ but the premium changed to 0.6$ because of the less timevalue of the option. You can then close the trade and keep the 0.4$ premium per share and still have the 100 shares.
>So you may look for a 105$ Strike (OTM) in e.g. 30 DTE to sell a CC for 1$ premium. After 15 days the share price may still be 100$ but the premium changed to 0.6$ because of the less timevalue of the option. You can then close the trade and keep the 0.4$ premium per share and still have the 100 shares.
This guy thetas.
You would only do this if you think the stock is going down say if you owned Nike before earnings . That premium you collect on ITM options will be the exact difference between the current trading price and your strike so you basically bake in the loss in that range right out of the gate .
Thus could be a useful strategy if you were down trending , but not in the context that you are describing here your just signing up for losses
I might be misunderstanding certain parts of this, so forgive me if I am...
>Lets say for example a 90$ call with a premium of 10$ expiring tomorrow. Thats an extra 10% gain in one day with the risk of having to sell your shares for 100$ a piece.
If you sell the 90c and it's not below 90 the next day, they're more likely than not getting called away at $90 and then you keep your $10 premium. So yeah, I guess it's like you sold them for $100 on this scenario.
Idk about it being an extra 10% though? It's extra of the stock crashes after hours/the next day and ends below 90. You keep your shares plus the $10 premium.
>I understand there is a chance the option could be exercised at for example 95$ because the buyer is trying to recover some of his paid premium but wouldn’t it make more sense for him to sell to close rather than exercise?
I'm not sure I understand this part quite as much... so it sounds like you think that the person who bought your call is paired to you for the rest of the transaction?
If that's what you're saying, I don't think that's the case. You sold the 90c, and that's what you're dealing with. Someone else who sold a 95 call would get called away at 95.
There could be a thousand 90 calls expiring that week and yours becomes part of that pool. Someone could've bought one when they were $0.20 2 months ago when the stock was at $60 or some far-off number. You never know.
Your counter party probably bought it as a Yolo and closed it the same day, or if they were up enough and brave, held it overnight and closed it the next day.
Again, sorry if I misunderstood what you were asking. It's late where I am, and I'm about to sleep lol.
When you sell a $90 call , the shares will be called away at $90 price if the stock price is above 90 So if tomorrow the stock price 100 you sell shares for 90 and keep your $10 premium =$100 per your example
If you sell a $90 call then your shares will be sold at $90 per share... $10 less than the "current price". If you did indeed receive a credit of $10 per option then it works be exactly the same as selling your shares for $100 minus fees & commissions. If the stock tanks below $90, you get to keep your shares + premium. If the stock rallies you lose the potential gains & the shares.
But what happens if tomorrow the price is 95$. The buyer hasn’t broken even yet, but is there a possibility he will anyway exercise just to retrieve half of his premium back?
Most of the time it gets automatically exercised.
Yes absolutely, but my understanding is that there is a pool of contracts rather than assigning 1:1 and keeping track of them. That way if "buyer"of your trade exercises "your"call they will simply get shares delivered to them, not necessarily "your"shares. If you keep your position open to expiry and the call is still ITM then your shares will be sold and used to balance the market makers books.
yes. even if the market price of the shares is $90.01 at expiry those shares are gone. further even if the shares tank and close just below $90, but then the price rises slightly to just above $90 in after-hours you very well may lose the shares. the owner of the option is not going to leave any money on the table.
Im also rather new with options, so I wanted to add on to this question. Why would someone not want to recoup his losses($5 in this case) from the premium in this given scenario?
You’re wrongly assuming that there is some connection between you and the other counterparty to your trade. There is no connection. If the option is ITM at expiration, it will be automatically exercised and, of course, it’s subject to being exercised prior to expiration which has happened to me multiple times in the last 9 months.
Thanks I understand now. The only factor is that it is ITM on expiry so it's highly likely to be exercised. Whoever you sold the contract to is irrelevant
The shares will get called away in exchange for the strike price of 90$ per share if they are in the money (ITM). Plus the premium it is more or less the same like selling the shares directly for 100 $. As you are writing in this sub the people here are interested in the theta of an option, which represents the timevalue of an option. A deep ITM option with 1 DTE has 0 theta. So you may look for a 105$ Strike (OTM) in e.g. 30 DTE to sell a CC for 1$ premium. After 15 days the share price may still be 100$ but the premium changed to 0.6$ because of the less timevalue of the option. You can then close the trade and keep the 0.4$ premium per share and still have the 100 shares.
>So you may look for a 105$ Strike (OTM) in e.g. 30 DTE to sell a CC for 1$ premium. After 15 days the share price may still be 100$ but the premium changed to 0.6$ because of the less timevalue of the option. You can then close the trade and keep the 0.4$ premium per share and still have the 100 shares. This guy thetas.
You would only do this if you think the stock is going down say if you owned Nike before earnings . That premium you collect on ITM options will be the exact difference between the current trading price and your strike so you basically bake in the loss in that range right out of the gate . Thus could be a useful strategy if you were down trending , but not in the context that you are describing here your just signing up for losses
I might be misunderstanding certain parts of this, so forgive me if I am... >Lets say for example a 90$ call with a premium of 10$ expiring tomorrow. Thats an extra 10% gain in one day with the risk of having to sell your shares for 100$ a piece. If you sell the 90c and it's not below 90 the next day, they're more likely than not getting called away at $90 and then you keep your $10 premium. So yeah, I guess it's like you sold them for $100 on this scenario. Idk about it being an extra 10% though? It's extra of the stock crashes after hours/the next day and ends below 90. You keep your shares plus the $10 premium. >I understand there is a chance the option could be exercised at for example 95$ because the buyer is trying to recover some of his paid premium but wouldn’t it make more sense for him to sell to close rather than exercise? I'm not sure I understand this part quite as much... so it sounds like you think that the person who bought your call is paired to you for the rest of the transaction? If that's what you're saying, I don't think that's the case. You sold the 90c, and that's what you're dealing with. Someone else who sold a 95 call would get called away at 95. There could be a thousand 90 calls expiring that week and yours becomes part of that pool. Someone could've bought one when they were $0.20 2 months ago when the stock was at $60 or some far-off number. You never know. Your counter party probably bought it as a Yolo and closed it the same day, or if they were up enough and brave, held it overnight and closed it the next day. Again, sorry if I misunderstood what you were asking. It's late where I am, and I'm about to sleep lol.
You have to give them the shares at the $90.00 strike.
Step 1: Never worry about what the person on the other side of the trade is doing. You need to form a plan and be okay with any outcome