A question about covered call options?

Question

I wrote a covered call by using the "sell to open" choice. I bought stocks a week ago for $25 and I wrote the covered call for $30 and it expires in March. The premium I got on the option was $.90 a share which came out to $90. After the transaction was complete, my cash value in my account went up $90. However, why did the value in my balances/positions go down by $100?

Thanks.

Yes but I don't own the option, so therefore if its price goes up why does it effect my portfolio? I sold the option, I did not buy it, so why does its price change matter?

Answer 1

Don't worry about that. As long as the strike price is decently above what you bought it for, there's a pretty low chance it will end up in the money on the day of expiration. You collect the premium no matter what in the money or out of the money. If it's a covered call for a strike out of the money, there is no way you lose money (unless it's a bad company and the share price drops drastically below your principal and u decide to sell).

Remember this: Most options expire worthless. Call option writers win more than half the time. Those is great odds.

The only downside I can think of is if you start writing without having owned the stock for more than one year, in which case, if the option ends up in the money you either have to buy a contract to offset the position to avoid short term capital gains or you'll end up selling the shares at the strike price. But if you are in a low tax bracket it's no big deal.

If you can't understand this message, you need to read up more on options or email me and I can explain it further.

Always test using options with one contract like you did.

I still remember the first day I ever bought an option. I was so pist I got beat for the bid/ask spread. It's easier to digest with one contract than 25 or 50 contracts. BTW, what stock is this for?

Answer 2

The option must have gone up to $1.00, which would have resulted in a $10 loss.

You are short the option, which means you lose when the price goes up.

Answer 3

I agree that the price of the call option may have increased, which is why your balance is down.

Answer 4

That's what you get for playing in a ultra-complex game without knowing all the rules.

Stick to Texas Hold Em stud.