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My first time ever selling covered calls didn't work in my favor (kinda).

Last February I sold 6/21/2024 $390s at $18 for $408 net. The shares were called that day at $409.62.

Anyways, I bought the shares back a few days later at $407.98.

I'm willing to try again.

So, just curious what covered calls you got right now?

I think I saw some posters with December and Januaries.

I sold August 9 450s yesterday for $1.85. I've been selling short dated close to the money calls on the theory that they have the fastest time value decay and I can get a new position up to once per week.

R:)

Currently I have various expiration dates September through January.

I generally go a bit shorter than that, more like 3-4 months. If the stock keeps rising, you can roll up and out which raises the breakeven but doesn't consume cash. However you do end up with a longer average time to expiry, which is my current situation.

Bear in mind if you're rolling them out to a later date that you NEED a higher breakeven to have the same odds of it being a good trade: remember that the value of a B share rises about (say) $3 a month on trend, give or take. A price that represented a good selling price a year ago might not constitute a good selling price a year from now!

The main thing to remember with trades like this: when you start, there are two possible outcomes, and you don't know which one you'll get. Either you get some cash, or you sell some stock at what appears to be a more-than-fair price. Be sure you're happy with both outcomes before you do it, and have no regrets. And when you enter this type of position, try to select a position that makes you *equally* happy with both outcomes. Don't have a favourite child.


I trust my valuation quite a bit, with error bars of course, but there is one interesting furrow in my brow at the moment.
In this post https://www.shrewdm.com/MB?pid=467102775
... I mention that "Since we know the level of the line at each date in the past, and we know the level of the price at each date in the past, we know the average ratio between the two. Looking at the average ratio since 2005 and applying it to today's level of that line, the price today "should be" $370.22 per B share in today's dollars. Thus, today's price of $441.26 is about 19% above what you would expect at the usual multiple since then. "
In short, current "normal" should be about $370.

However, we also know that Mr Buffett was doing buybacks at around $405 per B share equivalent a while back. That's quite a bit higher than the $370 "expected" price, not an obvious discount level. Price to book ratios give a similar anomaly, as he is buying at considerably higher multiples than he has before. Presumably he thinks they're worth $405 or more with some confidence. I'm pondering possible explanations---one more optimistic one is that he is expecting profit margins to improve back towards their old better levels in some of the divisions not doing so well lately. The stand-out here is BHE. If they were running at prior normal net margins, and you were to slap a modest multiple on the net earnings difference, that alone would be good for an additional $10 per B share in observable value.

Jim

Aug 425's BE at $432.25

Dec 455 and 465.

Average realized price if called away will by about $472.

Or I pocket a little beer money.

Jeff

Average realized price if called away....

The thing with "if called away" is that it rarely happens. I think nearly all people buying calls do not do so to eventually execute them, but are only interested in selling the calls for a profit.

Since Feb or so I have Jan'25 $430 ones --- although the shares now having been several times a lot higher than the strike, so if those calls during the last half year having been repeatedly sold and bought several people having had the opportunity to execute them, but none did do that.

Since Feb or so I have Jan'25 $430 ones --- although the shares now having been several times a lot higher than the strike, so if those calls during the last half year having been repeatedly sold and bought several people having had the opportunity to execute them, but none did do that.

Only the person holding the call at expiration is likely to exercise it (if it is in the money). No matter how many times a call is bought/sold someone will hold it at expiration.

The thing with "if called away" is that it rarely happens.

Almost every single call that is in the money at expiration will be executed and assigned. In fact, most brokers will do it for whether or not you asked them to.

Since Feb or so I have Jan'25 $430 ones --- although the shares now having been several times a lot higher than the strike, so if those calls during the last half year having been repeatedly sold and bought several people having had the opportunity to execute them, but none did do that.

That's only because it makes no economic sense at all to exercise them. Last trade for the Jan '25 430s was $29.10. It makes no sense whatsoever to exercise that 430 call right now, you have an asset that is trading at $29, you execute it and buy shares from someone at $430, by doing so, you just evaporated $28 worth of time value in that option. The person assigned will be absolutely delighted that you made such a terrible mistake. Economically, it makes much more sense to sell the option at $29, and then use that $29 plus another $401 to buy the stock. Stock will cost you a net of $401 instead of $430!

And it is just that, the time value, that results in most options only exercising at expiry (in fact, European style options can only be exercised at expiry). There are, of course, exceptions. Sometimes on ex-dividend day, options may be exercised to "capture the dividend". And that only happens when it is economically beneficial to do so.

Right. Only when the time value is gone executing is interesting. Thanks for reminding me.

Only the person holding the call at expiration is likely to exercise it (if it is in the money). No matter how many times a call is bought/sold someone will hold it at expiration.

That last bit is a good illustration generally, but isn't quite true. The open interest can fall prior to expiration. Only the contracts that are in the money and still open at expiration date will get exercised.

Jim

Dec 455 and 465.

Average realized price if called away will by about $472.

Right now the Dec 20 $455s are about $13 and the $465s are about $10.

So net exit price would be $468 and $475.

If not called you'd make $1,300 and $1,000 per contract.

I don't know. There's so many different options (heh), how do you even go about picking 1) an expiration date and 2) strike price?

For what it's worth, I think BRK.B is fully valued at $461.24 (based on peak p/b of 1.74 and peak book $265.08).

If we go back to 5 year trend we're looking at $356-370 and 1.35-1.4 x book. Perhaps a drop back to that level or stagnation for a year or two where the BV catches up. It's happened a few times before.

So net exit price would be $468 and $475.
If not called you'd make $1,300 and $1,000 per contract.

Those are the prices on offer today and at expiration those are the only two outcomes you can expect. If you were to sell those calls today you have to be content with the outcome either way. If the price runs to $500 you can’t have regret that you missed out on the upside. If the price drops to $350 you can’t have regret that you didn’t sell the entire position. You know with absolute certainty what you are getting regardless of the price of the security at expiration so make sure you are happy with it.

Just as an aside, the %premiums for those contracts are quite a bit higher than when I sold them compared to the price of BRK/b today. Today is a rather unusual day for volatility compared to the recent past which is just an example of how it is good to be a seller of options during times of high volatility.

I don't know. There's so many different options (heh), how do you even go about picking 1) an expiration date and 2) strike price?

To poorly paraphrase Jim’s previous comments, you want to have confidence in your valuation of the underlying security and the likely trading range at time of expiration. With the additional understanding that the market can do absolutely anything it wants when it comes to prices and make your original assumptions/confidence feel ridiculous.
For example, I had calls sold against all of my tax free BRK holdings with expirations mainly in June with all in prices of $400 to $420 and had all of those called away. I’m currently content to wait for better prices and sell some puts at all in prices I would like to own the shares at.

So why did I sell the 455-465? I happen to only have shares remaining in my taxable accounts and I really don’t want to have to sell and pay a ton of capital gains. Logic would say do nothing and just hold, but that’s boring. I feel it is unlikely we see prices in December at or above my all in levels or we will see prices drop enough between now and then where I can exit and capture a significant portion of the premium I received. And if I’m wrong and the price moves higher I can use my pile of cash to cover and avoid being called away. I personally cannot come up with a scenario where we see IV above $435 by year end. Seems like a decent bet I can cover at some point.

Jeff

I happen to only have shares remaining in my taxable accounts and I really don’t want to have to sell and pay a ton of capital gains.

You realize that when you are assigned on a short call, you don't have to deliver the shares that have been in your account long-term. Instead, you can purchase new shares and deliver those. All my shares are in taxable accounts and I've done so a few times over the years with various holdings (to avoid incurring large capital gains taxes due immediately).

Instead, you can purchase new shares and deliver those.

True. But it would take ALOT of cash. Maybe more cash than I have on hand at the time and I like the optionality cash has given me. It is a good reminder though.

Even if I had to pay the long term cap gains taxes on my holdings I think my after tax realized price would still be well above my estimates of IV at expiration. I could be ok with that depending on what reality looks like at the time. We have been in rare air recently.

Jeff

True. But it would take ALOT of cash. Maybe more cash than I have on hand at the time and I like the optionality cash has given me. It is a good reminder though.

It would hardly take much cash at all. Let's say it's a 425 strike call that expired in the money at a close of 428.36. So, come Monday morning after being assigned, the option holder sends you $42,500 (per option), and you then proceed to buy 100 shares for $42,836 and deliver them to the option holder. Total additional cash expended is $336.

Even if they were deeper in the money calls, the cash expended isn't ridiculously high. Let's say they were 400 strike calls. So close on Friday was 428.36, you get $40,000 from the exercise, you spend $42,836 on the shares. Cash expended is $2,836.

Now compare this to the alternative. You have long-term shares in your account with $100 basis. If you deliver those, you will have an immediate capital gain of $32,500 (for the sale at 425). The capital gains taxes on that (at 23.8% for most of us) will be $7,735. That's A LOT MORE cash expended than the previous technique described above.

the option holder sends you $42,500 (per option), and you then proceed to buy 100 shares for $42,836 and deliver them to the option holder. Total additional cash expended is $336.

What is the order of things happening?
Are you sure that you get the $42,500 first?
I would think that the exchange of money for stock is simultaneous, so you wouldn't have the cash available to buy the new stock shares first.

But maybe the broker gives you a few days to designate which shares you are delivering? I have read that Etrade lets you do that. But I wonder if they would let you say that you delivered a lot that you didn't own until a day or two after the call got exercised.

Of course, in a margin account you could buy the new lot beforehand.

What is the order of things happening?

I don't know, as I recall, it's always been same day, but not sure what the order of the cash flows were exactly. Usually the Monday after the Friday of option expiration. I've also had shares "dividend captured" via options the day of ex-dividend, and I've done it to others (exercised to capture the dividend when financially prudent to do so).

I’ll look into what my broker allows to see what’s possible. Appreciate the sharing of ideas. It’s why I spend my time here.

Jeff

Said said:
The thing with "if called away" is that it rarely happens. I think nearly all people buying calls do not do so to eventually execute them, but are only interested in selling the calls for a profit.

Options are rarely exercised before expiration because, except in some wierd corner cases involving dividends, it is more profitable to close the option position and either buy or sell the underlying instead of exercising early. This is because there is always at least some "time value" to the option that is lost on exercise.

If you "write" a call (sell a covered call) and you do not "close your position" (buy back the covered call you write) AND at expiration the call is in the money, I GUARANTEE you will see that call exercised.

So it is not a statistically random process that the longer you hold a call, the more likely it is to be exercised. It essentially will not be exercised before expiry, and it absolutely will be exercised if you have written the option and it expires in the money.

Enjoy,
R:)

rayvt:
What is the order of things happening?
Are you sure that you get the $42,500 first?

The order of cash flow is that you don't have to pay for your transactions immediately, there is a "settlement date" which is after the transaction. My broker (Fidelity) allows me to trade immediately on money it knows I am getting, so you should be able to buy the shares to cover using the strike price they know has to be coming in order for you to have to send those shares. And the actual cash probably gets moved the next day or so.

R:

allows me to trade immediately on money it knows I am getting, so you should be able to buy the shares to cover using the strike price they know has to be coming in order for you to have to send those shares.

"Should" is doing a lot of heavy lifting here.

Yes, you can do that with a sell and a buy in the same account. At most brokers. But not all. I had one broker that would not allow you to buy until the sell has settled.

But, they won't let you, say, transfer the money "it knows I am getting" before settlement to another account at the same broker and buy in that other account.
Under Balances, they show "Available to trade" and "Available to withdraw". The first is the unsettled proceeds from a sale that they know you are getting but have not gotten yet.

Anyway.......it comes down to the timing of when they credit your account with the proceeds from the exercise, in relation to when your shares are delivered.

A quick search show "Expiration time occurs on the third Saturday of the expiration month at 11:59 a.m. EST."
You could not buy the replacement stock to deliver until Monday morning.
I couldn't find anything that directly said when the money hits your account.
You will have to depend on your broker to credit the money as "Available to trade" on Monday. But the new shares are not in your account until settlement on Tuesday, whereas the existing shares leave your account on either Saturday or Monday, or Friday at the close (see below).

Interesting question. I think you would have to try it to see exactly what your broker does. For sure you will NOT be able to get this question answered by the telephone answerers at Customer Service -- too technical.
I am skeptical that you could buy shares after expiration and say that those are the shares that you delivered instead of the shares that you had owned. I think you would only be on solid ground with shares that you bought BEFORE expiration.

Which brings up another interesting question: Can you deliver shares that you bought but which have not settled? Techically you don't own the shares until T+1 settlement.
Which your broker will nastily inform you and slap your hand if you buy a stock and sell it the same or the next day in a non-margin account.

--------
I found a Q&A that said "I've never come across a broker that allows you to specify lots when you write covered calls but I've only used about half a dozen brokers for options in 35+ years. And if that ability exists, the key question is, does Vanguard allow you to do so?"
"The only way to find out is to call your broker and ask if you have the ability to designate which of your shares will be assigned. I doubt that you can."

When my Mom's full service broker did CC's for her, at exercise they coded it as a sale of 100 shares at the Friday close. Obviously that was the old shares, not new shares that you couldn't buy until Monday.
Of course, being a full service broker, they charged a full commission on the "sale". I complained to them and was told "That's how it is done, the stock is a sale in the CC account and a buy in the call owner's account."

I am skeptical that you could buy shares after expiration and say that those are the shares that you delivered instead of the shares that you had owned.

You might be skeptical, but it can be easily done, and it is easily done all the time. I've done it myself a few times over the years. Not only have I done it for "normal" Saturday expirations and assignment over the weekend, but at least once I did it when someone swiped a dividend from me on the top half of a bull call spread that was on a weekday, not on a Saturday. I jut looked it up, they were Apple 500 strike calls, exercised and assigned to me on Wednesday 8/6/2014 after the close. On Thursday 8/7/14 I purchased a bunch of shares to deliver, and delivered them. To add insult to injury, I also had to pay them the dividend (that's obviously how it works because they exercised and bought it at ex-div and I delivered after ex-div, that's how you "swipe" the dividend) of $0.47! But to make up for it, at the next ex-div day, on 11/5/14, I exercised the bottom half of that BCS, the 400 strike, and captured the dividend from whomever wrote those 400 strike options and was assigned with my exercise. And, sure enough, on 11/13/14 they paid me a $0.47 dividend!

One way to think about it is with the following thought experiment -

1. You sell (to open) a $100 strike call in stock XYZ.
2. Some time later, it expires on Saturday in the money.
3. Over the weekend, your broker notifies you that you have been assigned.
4. Come Monday morning, what do you do? You have to buy shares of XYZ to deliver (because you have no XYZ shares in that account).
5. Voila, you've delivered shares that you purchased on the Monday following the Saturday of assignment.

Do the same thought experiment but with owning shares of XYZ in another account.
Do it again with owning shares of XYZ in your own name (formerly "paper stock certificates").
Do it again with owning shares of XYZ in this account.
Do it again with owning MANY shares of XYZ in this account all at a different basis.

The whole system would be terribly unwieldy if you couldn't choose exactly which shares to deliver.

I jut looked it up, they were Apple 500 strike calls ...

By the way, I have it all recorded as a 400/500 Bull Call Spread, and when I entered the trade in early 2013 it was indeed a 400/500 BCS, but in June 2014, Apple did a 7:1 split, and then the spread turned into a 57.14/71.43 BCS, so the trade initial entry looks like this on my spreadsheet -

"Jan '15 spread 400/500 (57.14/71.43)"

Splits are very messy on tracking spreadsheets. Especially when there are options involved.

Splits are very messy on tracking spreadsheets. Especially when there are options involved.

Not nearly as bad as spinoffs : )

Sometimes it ends up that the deliverable is something like this: Each contract becomes 100 shares of A, 3 shares of B, and $1.13 cash.

Jim

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