37 lines
2.8 KiB
Plaintext
37 lines
2.8 KiB
Plaintext
86 Part II: Call Option Strategies
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AVOIDING THE UNCOVERED POSITION
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There is a margin rule that the covered writer must be aware of if he is considering
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taking any sort of follow-up action on the day that the written call ceases trading. If
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another call is sold on that day, even though the written call is obviously going to
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expire worthless, the writer will be considered uncovered for margin purposes over
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the weekend and will be obligated to put forth the collateral for an uncovered option.
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This is usually not what the writer intends to do; being aware of this rule will elimi
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nate unwanted margin calls. Furthermore, uncovered options may be considered
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unsuitable for many covered writers.
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Example: A customer owns XYZ and has January 20 calls outstanding on the last day
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of trading of the January series (the third Friday of January; the calls actually do not
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expire until the following day, Saturday). IfXYZ is at 15 on the last day of trading, the
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January 20 call will almost certainly expire worthless. However, should the writer
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decide to sell a longer-term call on that day without buying back the January 20, he
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will be considered uncovered over the weekend. Thus, if one plans to wait for an
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option to expire totally worthless before writing another call, he must wait until the
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Monday after expiration before writing again, assuming that he wants to remain cov
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ered. The writer should also realize that it is possible for some sort of news item to
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be announced between the end of trading in an option series and the actual expira
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tion of the series. Thus, call holders might exercise because they believe the stock will
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jump sufficiently in price to make the exercise profitable. This has happened in the
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past, two of the most notable cases being IBM in January 1975 and Carrier Corp. in
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September 1978.
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WHEN TO LET STOCK BE CALLED AWAY
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Another alternative that is open to the writer as the written call approaches expira
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tion is to let the stock be called away if it is above the striking price. In many cases,
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it is to the advantage of the writer to keep rolling options forward for credits, there
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by retaining his stock ownership. However, in certain cases, it may be advisable to
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allow the stock to be called away. It should be emphasized that the writer often has
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a definite choice in this matter, since he can generally tell when the call is about to
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be exercised - when the time value premium disappears.
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The reason that it is normally desirable to roll forward is that, over time, the
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covered writer will realize a higher return by rolling instead of being called. The
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option commissions for rolling forward every three or six months are smaller than the
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commissions for buying and selling the underlying stock every three or six months,
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and therefore the eventual return will be higher. However, if an inferior return has |