Is anyone into selling covered calls on interactive brokers? I sold a call option against 100 shares of TSLA that I own. When stock price reached the strike price though, the shares did not get sold/assigned and the unrealized loss on call option kept on going up. Wanted to learn if shares are sold only at expiry date? And what are some of the other factors to keep in mind while selling covered calls. Thanks!
Options are almost never exercised early due to time premium. You will be assigned at expiration if the options settle in the money.
Mostly, the shares are exercised on/near expiry date. Unless they are deep ITM and there is no time value left. But in your case, it still should have time value. So, there is no point in exercising by the counter party. Basically, the buyer of the option has the right to make that call. Nothing you can do
Thanks! In case the option remains out of the money at expiration (i.e., stock keeps going up) I shouldn't be making a loss right? The loss on option position would be balanced by the gain in the shares sold?
If the stock keeps going up your options will become deeper in the money. You will lose any upside above the strike price.
Early exercise rarely makes sense. There's an intrinsic value to the option (current - strike), and a time value (the value of the optionality). As current price becomes much greater than the strike, the time value approaches zero but not quite. So you're still better off selling the option and buying the shares with cash than exercising early. It makes sense to exercise early if: - there's a large dividend that you would get from actually owning the stock. Not the case with TSLA or any growth stock. - theres a huge tax benefit to owning the shares earlier (think startup equity right before a new 409a valuation) - there's a lot of friction in the market - if it's not easy to "sell the option and buy with cash" then you might want to exercise since the writer of the option most legally sell you the shares for $X and not a penny more. Again, none of these apply to a large name like TSLA. So the only reason a call that you wrote will be exercised is if some moron who doesn't understand options basics bought it and exercised early. Technically, this is a good thing for you; but practically it might mean that you have major cash flow issues / margin calls.
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Yup afaik you would be assigned mostly only at expiry if the underlying is ITM at expiry
Op won't be assigned. Op is seller. The buyer will be assigned. The shares will be taken away from op
@NVIDIA Incorrect on the terminology. Buyers exercise, and sellers are assigned.