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We sell a covered call or cash-secured put and the cash is immediately placed into our broker cash account. Next, we check our account value, and it did not go up! In some cases, it went down! Where did the option premium money go? This article will explain the broker accounting process and rationale as they relate to selling options.

What is unearned income or revenue?

This is income received with an attached liability. Before we get into options, here’s an example we have all experienced: We purchase an airline ticket for a flight scheduled a month from the sale date. From the airline’s perspective, revenue is generated, but there is the attached liability to provide the flight. Until that service is provided, the income is considered unearned.

Let’s now move to our world of option-selling. We sell the option (airline ticket), but now have an attached obligation, our contractual commitment to buy (puts) or sell (calls) the underlying shares. The contract agreement ceases in one of three ways:

  • Short call or put is bought back (closed)
  • Short option is exercised
  • Option expires worthless

Once our contract obligation ends, the option income is now realized and will be reflected in our broker statements. Until then, the statement will reflect the liability attachment.

Broker accounting process for our contractual obligations

The cash generated from our option sales is, in fact, in our cash accounts. However, when tabulating our total account value, the debit to buy back the option(s), is also reflected in that total. If we sold the option for $2.00 (bid price), the cost to buy it back (at the time of the sale) may be $2.10 (ask price). In this hypothetical, our account value will fall by $10.00 per contract. These liability connotations in our broker statement can be bracketed in red or with minus signs, as shown in the screenshot below.

Real-life examples from one of Alan’s accounts

  • Stock (ETF) positions are highlighted in yellow
  • Short calls are highlighted in brown
  • Market value (purple oval) shows positive value for the securities and negative value for the short options
  • Gain/loss (red oval) shows that if shares are sold today, all positions would result in a profit (yellow cells); if option positions were closed, all would result in a net debit (brown cells)

Discussion

When we sell our options, the premium cash is in our accounts and available for our use. Our broker’s statement will reflect the liabilities associated with these sales in the form of the cost-to-close (CTC) our short positions, until our commitments no longer exist. It should be noted that the CTC values will change according to the market value of these premiums.


Covered Call Writing: A Streamlined Approach

How to consistently beat the market using our CEO Strategy

This book Is written for investors seeking a low-risk approach to generating cash flow in a user-friendly and time efficient manner. It utilizes covered call writing and then tailors the strategy to achieve the following goals:

  • Sell options to lower our cost-basis
  • Generate weekly or monthly cash flow with reduced but still significant initial percent returns
  • Reduce the database of underlying securities available from 8500 to 11
  • Reduce the number of exit strategy considerations from 14 to 4
  • Beat the market on a consistent basis
  • Reduce portfolio volatility

This book provides a roadmap as how to accomplish these objectives. The “how”, the “why” and the “when” is addressed for every aspect of each trade. Chapters 9 through 20 show every trade the author executed for each monthly contract in 2022. Screenshots taken from the Scwab.com platform are archived in each chapter.

Here’s what you will not find in this book:

  • A stock called “XYZ”
  • Hypothetical trades
  • Computer generated trades
  • Unrealistic promises
  • Only winning trades

Join us in this 1-year journey using our CEO Strategy, a streamlined approach to covered call writing.

Click here for more information.


Your generous testimonials

Over the years, the BCI community has been incredibly gracious by sending our BCI team email testimonials sharing stories as to what our educational content has meant to their families. Moving forward, we have decided to publish several of these testimonials in our blog articles. We will never use a last name unless given permission:

Alan, 
 
The podcast on Dividend Covered Calls was superb! It was Very Helpful for quite a few areas in my understanding of quite a few concepts, both in general and with other areas especially with regard to things from your website! 
 
Thank you very much! 
 
Kindest regards,
Michael
 
 

Upcoming events

1. BCI-only Webinar

1/16/2025

8 PM ET – 9:30 PM ET

The Collar Strategy: Covered Call Writing with Protective Puts

Protecting covered call trades from catastrophic share loss 

This is the strategy Bernie Madoff pretended to use. He called it the split strike conversion strategy, but it was simply a collar. The covered call sets a ceiling on the trade and the protective put guarantees a floor on the trade.

Topics discussed

  • What is the collar strategy?
  • Uses for the collar
  • Entering a collar trade
  • Option basics for calls
  • Option basics for puts
  • Real-life example with NVDA
  • What is an option-chain?
  • Real-life example using the BCI Trade Management Calculator (TMC)
  • Strategy pros & cons
  • Educational products & discount coupon
  • Q&A

Click here to register for free.

2. Long Island Stock Investor Group Part I

Zoom

February 13, 2025

7:30 – 9:00 ET

Private investment club

Covered Call Writing Dividend Stocks

 

3. Las Vegas Money Show

February 17 – 18, 2025

  1. Ultra Low-Risk Approaches to Covered Call Writing and Selling Cash-Secured Puts
  2. Covered Call Writing Technology Stocks

Register here.

4. Long Island Stock Investor Group Part II

March 13, 2025

7:30 – 9:00 ET

Private investment club

Cash-Secured Puts: 2 Outcomes

5. MoneyShow Masters Symposium Miami 2025

Thursday May 15, 2025

Details to follow.

Alan speaking at The All Stars of Options event in Las Vegas