Short Call Options aka Naked Call

Mike September 9th, 2011 at 8:15am

If I own 200 shares of a stock and it is trading below $4.00 @ $3.50 and my exit point is @ $4.00 . Would it make sense to sell $4.00 calls to generate income?

Thanks,
Mike

Peter August 17th, 2011 at 6:51am

Mmmm...maybe. Your short call will offset the long stock so you've bought another call at a different strike to benefit if the stock rallies. If the stock falls, you can buy back the short call but you'll still have the gains in the long stock that you'll forgoe plus the premium lost with the call you've just purchased.

Maybe just closed them all out and start again with another stock ;-)

Annie August 16th, 2011 at 8:41am

"What are the details of the trades? I.e. What was the price you paid for the stock and price you sold the call and what strike?"

Stock price paid: $145.11

Short call is presently a Jan12 145 as I rolled it up and out recently.

Two premiums were received: $9.05 the first time and $1.27 when I rolled it.

Since there is time to play with this option -- and if I BTO a long Jan12 call -- I've been a-thinkin' that the trade could win by (1) selling the stock at (or near) its peak and (2) BTC the short call when (if) the premium drops reasonably, and then (3) STC the long call when it drops to $.05 (or let it expire -- possibly rolling it back in if that would provide another credit.

Am I dreaming?

Peter August 16th, 2011 at 1:12am

Hi Annie,

You can buy a call at a different strike price but this won't really help your situation. If you want an option with a low premium then it is going to be out-of-the-money and therefore have a low delta. This means that as the market moves up the option value won't change as much as the value will change for your in-the-money option. So, net you are still going to lose more because of the short call.

The thing is, by selling a call on a stock that you already own you're effectively locking in to sell the stock at the strike price. Now that the stock has rallied there's not much you can do but bank the premium received to offset the loss made by the call price increase.

What are the details of the trades? I.e. What was the price you paid for the stock and price you sold the call and what strike?

Annie August 15th, 2011 at 10:30pm

Hello. I just discovered this site and am hopeful that my concerns can be resolved by your thoughtful response(s). I have a long position on a stock that has risen $20 recently. Just before this rally, it was headed south, so I sold a call at a strike lower than my purchase price to gain some income. I'd like to sell the stock at this new high, but the short call is impeding that sale. The short call has risen to an astronomical figure, so I cannot buy it back but must await the stock price to cycle back down. If I wait for that to happen, I will have missed this opportunity to sell the stock at this high pricing. Question: Can I BTO a long call as a replacement for the stock? Does it matter how high a strike price I choose? I'd like to keep the premium I will pay for it low. Thank you! ! !

Peter August 13th, 2011 at 11:24pm

Hi OB,

The delta of an option is determined by using an option pricing model. You can see an example in my option spreadsheet. Some brokers include greek calculations in the platform that they provide their clients. If not provided then the traders themselves will need to source software if they want to see the greeks.

The section on option greeks will answer this question.

The greeks aren't factored into the option calculations: it is the other way around. The greeks are the output when using an option valuation model.

OB August 13th, 2011 at 10:31am

Hi,

I have a few questions which I'm confused by and need some detailed explanations on. Thx for your assistance

First question: How is the Delta of an option determined and who determines it. That is, how is a trader informed that the Delta of an option is say, 0.47.

Secondly: How do the 1st derivatives greeks affect/impact the valuation of the risk exposure from an options trade (call or put)


Thirdly: How are all the 1st derivatives greeks factored into an options valuations such that one gets an indication of what is needed to Hedge the options exposure (call or put)

Peter August 10th, 2011 at 5:30pm

Yes, you can buy the option back at a lower price to close out your short position. The difference between the price you bought and the price you sold the option is your profit/loss.

VIshal August 10th, 2011 at 11:16am

If I sell an OTM option at the start of new series and when the expiry is near, the value of option will automatically lowered due to time constraints (suppose call is now ITM). Now If I close my position by buying the ITM option, would I still get benefited?

Peter July 16th, 2011 at 7:32am

You will be short the stock at a price of $300 and then be showing an unrealized loss of $20 if the stock is trading at $320. You will, however, have the initial premium that you received when you sold the option to offset the loss on the stock.

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