Comments on: Why Would a Call Buyer Exercise, Rather than Sell, an In-The-Money Call Option? https://www.thebluecollarinvestor.com/why-would-a-call-buyer-exercise-rather-than-sell-an-in-the-money-call-option/ Learn how to invest by selling stock options. Fri, 15 Sep 2017 17:46:48 +0000 hourly 1 By: spindr0 https://www.thebluecollarinvestor.com/why-would-a-call-buyer-exercise-rather-than-sell-an-in-the-money-call-option/#comment-126689 Fri, 15 Sep 2017 17:46:48 +0000 http://www.thebluecollarinvestor.com/?p=15937#comment-126689 In reply to Alan Ellman.

Alan,

IMHO, those who have large cap gains and don’t want to realize them and face the tax man should be ultra careful with call writing because in life, like on my keyboard, Shift Happens. Since I’m not a fan of rolling short calls up for a debit in order to protect paper gains, I’d avoid CC writing on a stock you don’t want to give up (for tax reasons). The market has a perverse way of making you pay for that. I’d sooner book gains and carry paper losses but that’s a bit far afield from CCs.

I’ve had several short option positions assigned early in the past few weeks and that’s a good thing since the money is freed up for redeployment. It’s a fairly rare event but it’s a real treat when a short option with decent time premium is assigned early.

Spin

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By: spindr0 https://www.thebluecollarinvestor.com/why-would-a-call-buyer-exercise-rather-than-sell-an-in-the-money-call-option/#comment-126676 Fri, 15 Sep 2017 16:27:12 +0000 http://www.thebluecollarinvestor.com/?p=15937#comment-126676 In reply to spindr0.

PS Take a look at the ATM put and call for near term expirations for AVGO and BBY. Both throw off a dividend on 9/18 and you can see how the pending dividend is making the short put appear to be more attractive than the covered call.

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By: Alan Ellman https://www.thebluecollarinvestor.com/why-would-a-call-buyer-exercise-rather-than-sell-an-in-the-money-call-option/#comment-126674 Fri, 15 Sep 2017 16:20:00 +0000 http://www.thebluecollarinvestor.com/?p=15937#comment-126674 In reply to spindr0.

Spin,

I agree 100%…no dividend arbitrage with calls, only puts. However, as you know, in the practical world of investing, there are retail investors who will exercise to capture a dividend even if it is not in their best interest to do so. For those of us who want to retain our shares perhaps at the risk of serious tax consequences, it is important to understand how to circumnavigate ex-dates. This will be addressed in a future (already written) article.

Glad you survived the hurricane!

Alan

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By: spindr0 https://www.thebluecollarinvestor.com/why-would-a-call-buyer-exercise-rather-than-sell-an-in-the-money-call-option/#comment-126672 Fri, 15 Sep 2017 16:09:09 +0000 http://www.thebluecollarinvestor.com/?p=15937#comment-126672 In reply to MarioG.

Mario,

The risk profile of a CC and a CSP are similar. When you evaluate them, make sure to account for dividends since they inflate the put’s premium and deflate the call’s.

The return for the CSP is slightly less because of the carry cost which inflates call premium. In order to overcome this, you have to do something creative with the cash requirement. Some brokers permit linked MM accounts, etc.

The main advantage of the CSP is that if successful, you will incur two fewer commissions as it expires (the CC will be assigned).

Spin

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By: spindr0 https://www.thebluecollarinvestor.com/why-would-a-call-buyer-exercise-rather-than-sell-an-in-the-money-call-option/#comment-126663 Fri, 15 Sep 2017 15:28:08 +0000 http://www.thebluecollarinvestor.com/?p=15937#comment-126663 In reply to Alan Ellman.

Alan,

Five days without power after Irma. Brutal. I can’t imagine what it’s like in Houston.

Regarding your example: With KLA at $100.16 the $97.50 call has $2.66 of intrinsic value. However, the quote is $2.50 by $3.50 which means that if the call owner wants to sell, he will take a 16 cent haircut. If he does, the market maker/floor trader buys it for $2.50, exercises the call and buys the stock for $97.50 for a cost of $100. He simultaneously sells the stock for $100.16, obtaining the 16 cent difference.

The owner of the call can do this himself at any time instead of taking the 16 cent haircut (not just when there is a pending dividend), assuming that his commission structure is low enough to make it worthwhile. This is more feasible at a broker like Interactive Brokers that charges no assignment or exercise fees.

This 3 step execution is Discount Arbitrage and has nothing to do with the pending dividend. The dividend is indirectly involved because market makers are partially discounting ITM options (depending on the amount they are ITM) to account for the pending dividend. Otherwise there would be a free money arbitrage available – and they don’t give it away. If enough call owners who anticipate the dividend sell, it drives the call’s price below parity (negative intrinsic value) and presents the Discount Arbitrage opportunity explained above.

There is no situation where there is a Dividend Arbitrage available if the dividend distribution is greater than the time value remaining in the call’s premium. That occurrence is with the put and I’ll leave it to you to explain that in your future arrticle.

Spin

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By: Alan Ellman https://www.thebluecollarinvestor.com/why-would-a-call-buyer-exercise-rather-than-sell-an-in-the-money-call-option/#comment-126539 Thu, 14 Sep 2017 09:58:21 +0000 http://www.thebluecollarinvestor.com/?p=15937#comment-126539 In reply to MarioG.

Mario,

15-25 positions: I have 3 portfolios dedicated to covered call writing. The total number of stocks and ETFs is between 15 – 25, closer to 25 so I may average 8 underlyings per account.

50 – 100 contracts, closer to 100: This aspect will increase as my portfolio net worth increases. This means that if I hold 25 underlyings, I will average 4 contracts per positions and yes, it may include laddering strikes.

I also manage a small covered call portfolio for my mother.

I also have been managing a fairly substantial real estate portfolio which I have been gradually closing out so I can dedicate more time to our BCI community (more books, calculators, trading tools etc. coming) first and my personal stock portfolios second.

Alan

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By: MarioG https://www.thebluecollarinvestor.com/why-would-a-call-buyer-exercise-rather-than-sell-an-in-the-money-call-option/#comment-126525 Thu, 14 Sep 2017 02:50:45 +0000 http://www.thebluecollarinvestor.com/?p=15937#comment-126525 In reply to Alan Ellman.

Alan,

I need you to clarify this statement which you have used in many responses? I am still confused on what you are actually saying.

“For me, my comfort level is 15 – 25 positions and 50 – 100 contracts per month (plus a few in my mother’s portfolio).”

When you say 15-25 positions, do you mean the 15-25 positions are each a contract position, with different, not repeated stock symbols. Then when you say 50-100 contracts that you write 50-100 contracts (CSPuts or CC) against those 15-25 different stock positions,maybe laddering them (ITM, OTM) in the proportion of ITM versus OTM for the current month.

I gather you are distributing these positions over multiple brokerage accounts.

****
To describe my count, I have 5 accounts, qualified / qualified in 2 brokerages, including 1 joint trust account.

For this month I distributed over the 5 accounts 23 contract positions (almost 5 per account) (CsPut or Covered call) using 11 different stocks. Many of the contracts are repeated in at least 3 accounts. Using your vernacular, is it equivalent to say I have 11 different positions with 23 contracts? That is my confusion.

To get fully invested I add a contract that just fits into the remaining usable cash in an account, so I end up at least 90-95% invested at the end.

I have had this problem in describing positions when I read your Encyclopedia, so I want to see if I can clear this up.

Thanks,

Mario

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