Covered Call Question

[adamrick]

I sold a covered call on CORN (2 contracts). The premium was $800. I still haven't received it (two days later). I emailed eTrade and this is the response I got:

"After looking into your account, I was able to locate a Buy-Write transactions where 200 shares of CORN was purchased and 2 call options contracts were sold. Its appears that the premium received from selling the call options was used to decrease the total cost of purchasing the shares. You can view this activity by logging into your account and selecting the tab Trading & Portfolios >> Transaction History. Please let us know if there are any further questions.

Maybe I am having a brain fart, but I do not not understand what happened. In my transactions report, I can clearly see that the $800 was deposited into my account. But if they used the $800 premium to decrease the cost of purchasing the shares, wouldn't the net value of my account still increase by $800?

I think i'm missing something here.

 

[wackypete2]

Did you already own 200 shares of CORN before you sold 2 covered call options??

Also, you say you still haven't received the money but you see the $800 was deposited into your account? Please clarify what you mean.

Out of curiosity how long have you been trading?

Peter

 

[adamrick]

Did you already own 200 shares of CORN before you sold 2 covered call options??

Peter

It was a buy-write, in my transaction history it shows that I bought the 200 shares of CORN a few seconds after I sold the call. So I guess not?

 

[wackypete2]

Right, that's what I thought. Some of the $800 you received was used to cover commission costs for the transaction(s). The call is still valued at the market rate, ie: If you sold the call @ 4.00, the cost to buy it back might be $4.10. IF the prices of the stock and option had NOT moved since you completed the transaction your account would be showing a lower net equity than prior to the purchase by the exact amount of the commissions and difference in repurchase cost (-$10.00 per option).

Peter

 

[wackypete2]

It was a buy-write, in my transaction history it shows that I bought the 200 shares of CORN a few seconds after I sold the call. So I guess not?

Not to be mean here, but do yourself a favor and read/learn more about options before trading them further. You appear to be not very sure of what you did or what exactly happened. Option trading is like playing with fire if you don't have a good understanding of them.

Peter

 

[adamrick]

Not to be mean here, but do yourself a favor and read/learn more about options before trading them further. You appear to be not very sure of what you did or what exactly happened. Option trading is like playing with fire if you don't have a good understanding of them.

Peter

Thanks for the help, I appreciate it.

I have absolutely no idea why I decided to start trading options. It's more complicated than I thought. Anyway, thank you again for your help.

 

[Wwill]

It would be easier and clearer if you just sold 2 naked puts as it has the same risk profile and no transaction costs for the underlying...

 

[wackypete2]

It would be easier and clearer if you just sold 2 naked puts as it has the same risk profile and no transaction costs for the underlying...

Selling naked options is generally not available to everyone. Brokers typically restrict these transactions or restrict your account to not accept them, ESPECIALLY if you are new to trading. You may also need a large minimum account balance to qualify.

Peter

 

[adamrick]

Selling naked options is generally not available to everyone. Brokers typically restrict these transactions or restrict your account to not accept them, ESPECIALLY if you are new to trading. You may also need a large minimum account balance to qualify.

Peter

To get out of the option contract, all I have to do is buy back the call I sold right?

 

[wackypete2]

To get out of the option contract, all I have to do is buy back the call I sold right?

Correct.

 

[Windlesham1]

Are you a novice trader? I have been trading for 13 years and know zero about commodities and options on commodities.That's a whole other world,but I presume you have been reading all the press about corn crop failure and impending price increase. There are no free lunches here. I don't know what style that call is,or how the underlying works. You cannot do much damage and if corn tanks you will still have the premium from the calls you sold

 

[Windlesham1]

Of course if corn goes to the moon,you will get called away,and still win. Worst case is corn tanking,if it rises you just miss out on bigger profits,which is why it's a horrible strategy.

 

[Wwill]

May I suggest the book
Amazon.com: fontanills - the options course - high profit and low stress trading methods. 2nd ed: Books

wich is one of the best books on options recently issued... but regretfully I cannot find it in Kindle format.