Short Call Options aka Naked Call

Peter March 26th, 2012 at 8:00pm

Hi Ding,

Yep, long call and short put both need a bullish underlying to be profitable.

Ding March 20th, 2012 at 11:35pm

Hi Peter,

Can I say, long call and short put are affected by the same direction of the market?

If not, what are the differences?

Thanks.

Rusty March 1st, 2012 at 5:24pm

Great site, and Peter you are so responsive. I've got a question for you as I am learning more about option trading, particulary spread option strategies. When it comes to writing call and put options - how close is too close to the money at expiration?

Meaning, lets say I got an Iron Condor set up on the SPY with my short call option strike at 138, and the short put position at 135. I get that if I let the short options expire in the money, that could be a BIG problem and I could get assigned. BUT I've seen some people say that no matter what, close out of your short positions - even if the option is OTM - do you suggest this? That would eat into my credit that I got on the front end.

Say the SPY closes 2 cents from my short call at 138? Would that be too close to the money for your comfort? What if I'm 25 cents away, 50, a dollar - is that far enough to assure no assignment upon expiration?

Just curious to get your thoughts. People talk about how easy these strategies are IF the stock price stays away from your short position - but is there still REAL risk it could get assigned if you don't close your short position before expiration?

Peter February 23rd, 2012 at 5:23pm

Hi Scott, if you mean "early exercise" (exercised before the expiration date) then no, not always. A call option holder may exercise early if there is a dividend due to be paid, that way s/he will take delivery of the stock, which mean s/he is entitled to receive the dividend. Holding a call option only doesn't entitle you to receive dividends.

If you mean at expiration (and the options are physically settled) then yes. Upon expiration, all physically settled call options are automatically assigned into stock positions by the option clearer (usually your broker).

Scott February 23rd, 2012 at 12:09pm

If I write a covered call, and the position is in-the-money, will it always be exercised?

Peter January 15th, 2012 at 5:38pm

The bid/ask prices seen in the market are usually the result of market makers who will quote options based off a theoretical pricing model such as the black scholes model or the binomial model.

When you can place orders depends on the exchange: some exchanges have a pre-market where you can enter orders before matching begins. However, I prefer to only place orders during market hours.

SKB January 14th, 2012 at 9:04am

First Question: How the price of an option (call or put) fixed? Is there any calculation?

Second Question: We should buy or sell an option in market hours only or after or before market time?

Peter January 12th, 2012 at 4:28pm

Hi Al Moura, yep, you can just buy the same amount of options that you are short from the market to square off your position.

Al Moura January 12th, 2012 at 12:25pm

Is it possible to use an option call to offset a short stock position? The short call of my option spread was exercised and I became short stock.
I do not have the shares and I am wondering if I can purchase an option call to cover that short.
Thanks,
Al

Peter January 9th, 2012 at 3:53pm

Not sure exactly what you mean by "net a zero change" but, yes, the stock will drop by the amount of the announced dividend after the stock goes ex-div.

If you exercise a call option after that date you will not receive the dividend but you will still be assigned a position in the stock at the strike.

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