Covered call when stock position is at a loss
It's unclear what you're asking. When I originally read your question, it seemed that you had closed out one options position and opened another. When I read your question the second time, it seemed that you were writing a second option while the first was still open. In the second case, you have one covered and one naked position. The covered call will expire worthless, the naked call will expire in the money. How your broker will resolve that is a question best left for them, but my expectation is that they will assign the non-worthless calls. Whereas, if both options expired in the money, you would be assigned and you would have to come up with the additional shares (and again, that depends on how your broker works). In general, for both cases, your net is the premiums you received, plus the difference between strike price and the price that you paid for the stock, minus any cost to close out the position. So whether you make a profit is very much dependent on how much you received for your premiums. Scenario #1: close first call, write second: Scenario #2: write covered + naked, one expires worthless Scenario #3: write covered + naked, both expire in the money Disclaimer: the SEC does not consider me a financial/investment advisor, so this is not financial/investment advice "If your shares get called on stock at a price below what you paid for the stock, your gain or loss depends on what premium you got for the options you sold.  ""can I deliver shares at that assigned strike using margin or additional capital if I have it? Can the broker just take care of it and let me collect the time premium? "" You don't need margin or any cash because you already hold the shares. A covered call means your cash requirements are 'covered'. So they'll just buy your shares at the strike price of $50. And you still get to keep the premium (which you should have gotten when you sold the covered call).  You only need cash or margin when you've sold an uncovered call or put." An expired option is a stand-alone event, sold at $X, with a bought at $0 on the expiration date.  The way you phrased the question is ambiguous, as 'decrease toward zero' is not quite the same as expiring worthless, you'd need to buy it at the near-zero price to then sell another covered call at a lower strike.  Edit - If you entered the covered call sale properly, you find that an in-the-money option results in a sale of the shares at expiration. When entered incorrectly, there are two possibilities, the broker buys the option back at the market close, or you wake up Sunday morning (the options 'paperwork' clears on Saturday after expiration) finding yourself owning a short position, right next to the long. A call, and perhaps a fee, are required to zero it out.  As you describe it, there are still two transactions to report, the option at $50 strike that you bought and sold, the other a stock transaction that has a sale price of the strike plus option premium collected. I don't think you understand options. If it expires, you can't write a new call for the same expiration date as it expired that day. Also what if the stock price decreases further to $40 or even more? If you think the stock will move in either way greatly, and you wish to be profit from it, look into straddles.
"There is unlimited risk in taking a naked call option position.  The only risk in taking a covered call position is that you will be required to sell your shares for less than the going market price. I don't entirely agree with the accepted answer given here.  You would not lose the amount you paid to buy the shares. Naked Call Option Suppose take a naked call option position by selling a call option. Since there is no limit on how high the price of the underlying share can go, you can be forced to either buy back the option at a very high price, or, in the case that the option is exercised, you can be force. to buy the underlying shares at a very high price and then sell them to the option holder at a very low price. For example, suppose you sell an Apple call option with a strike price of $100 at a premium of $2.50, and for this you receive a payment of $250. Now, if the price of Apple skyrockets to, say, $1000, then you would either have to buy back the option for about $90,000 = 100 x ($1000-$100), or, if the holder exercised the option, then you would need to buy 100 Apple shares at the market price of $1000 per share, costing you $100,000, and then sell them to the option holder at the strike price of $100 for $10,000 = 100 x $100.  In either case, you would show a loss of $90,000 on the share transaction, which would be slightly offset by a $250 credit for the premium you received selling the call.  There is no limit on the potential loss since there is no limit on how high the underlying share price can go. Covered Call Option Consider now the case of a covered call option.  Since you hold the underlying shares, any loss you make on the option position would be ""covered"" by the profit you make on the underlying shares. Again, suppose you own 100 Apple shares and sell a call option with a strike price of $100 at a premium of $2.50 to earn a payment of $250. If the price of Apple skyrockets to $1000, then there are again two possible scenarios. One, you buy back the option at a premium of about $900 costing you $90,000.  In order to cover this cost you would then sell your 100 Apple shares at the market price of $1000 per share to realise $100,000 = 100 x $1000.  On the other hand, if your option is exercised, then you would deliver your 100 Apple shares to the option holder at the contracted strike price of $100 per share, thus receiving just $10,000 = 100 x $100.  The only ""loss"" is that you have had to sell your shares for much less than the market price." "Yes, long calls, and that's a good point. Let's see... if I bought one contract at the Bid price above...          $97.13 at expiry of $96.43 option = out of the money =- option price(x100)          = $113 loss.     $97.13 at expiry of $97.00 option = out of the money =- option price(x100)          = $77 loss.     $97.13 at expiry of $97.14 option = in the money by 1-cent=$1/contract profit - option price(x100) = $1-$58          = $57 loss   The higher strike prices have much lower losses if they expire with the  underlying stock at- or near-the-money. So, they carry ""gentler"" downside potential, and are priced much higher to reflect that ""controlled"" risk potential.  That makes sense. Thanks." "Summary of accepted answer: Your ""loss"" will not count as a loss (to the IRS).  Which means no tax deduction for a ""short-term capital loss"" (on that sale). Instead, the IRS simply pretends like you had paid less for the stock to begin with." I think you need to be very careful here. Covered calls don't reduce risk or increase performance overall. If they did, every investment manager would be using them. In a typical portfolio, over the long term, the gains you give up when your stock goes beyond the strike of your calls will negate the premiums you receive over time. Psychologically, covered calls are appealing because your gains happen over a long period and this is why many people suggest it. But if you believe the Black-Scholes model (used for pricing options) this is what the model predicts over the long term - that you won't do any better than just holding stock (unless you have some edge other traders don't). Now you say you want to reduce diversification and raise your risk. Keeping in mind that there is no free lunch, there are several ways to reduce your risk but they all come at a price. For simplicity, there are three elements to consider - risk, potential gain and cash. These are tradeoffs and you can't simultaneously make them all favorable. You must trade one or more of them to gain in the others. Let's say you wanted to concentrate into a few stocks... how could you counteract the additional risk? 1) Covered calls: very popular strategy usually intended (erroneously) for increasing returns. You get the bonus of cash along with marginally less risk. But you give up a substantial amount of potential return. You won't have blowout returns if you do this. You still face substantial risk. 2) Collar your stock: You sell a covered call while using the cash from the sale to buy puts for protection. You give up potential gains, you're neutral on cash but gain significantly on reducing risk.  3) Use calls as proxy for stock: You don't hold stock but only calls in equivalent delta to the stock you would have held. Substantially lower risk while still having potential gain. Your tradeoff is the cash you have to pay for the calls. When using this, one must be very, very careful not to overleverage.  4) Puts as protection for stocks: This is basically the same as #3 in tradeoffs. You won't overleverage and you also get dividends. But for the most part it's the same. These are the main ways to reduce the risk you gain by concentrating. Options themselves are far broader. But keep in mind that there is no free money. All these techniques involve tradeoffs that you have to be aware of. Yes, as long as you write a call against your stock with a strike price greater than or equal to the previous day's closing price, with 30 or more days till experation there will be no effect on the holding period of your stock. Like you mentioned, unqualified covered calls suspend the holding period of your stock.  For example you sell a deep in the money call (sometimes called the last write) on a stock you have held for 5 years, the covered call is classified as unqualified, the holding period is suspened and the gain or loss on the stock will be treated as short-term. Selling out of the money calls or trading in an IRA account keeps things simple. The details below have been summarized from an article I found at investorsguide.com.  The article also talks about the implications of rolling a call forward and tax situations where it may be advantageous to write unqualified covered calls (basically when you have a large deferred long term loss). http://www.investorguide.com/article/12618/qualified-covered-calls-special-rules-wo/ Two criterion must be met for a covered call to be considered a qualified covered call (QCC). 1) days to expiration must be greater than 30 2) strike price must be greater than or equal to the first available in the money strike price below the previous day's closing price for a particular stock.  Additionally, if the previous day's closing price is $25 or less, the strike price of the call being sold must be greater than 85% of yesterday's closing price. 2a) If the previous day's closing price is greater than 60.01 and less than or equal to $150, days to experation is between 60-90, as long as the strike price of the call is greater than 85% of the previous days close and less than 10 points in the money, you can write a covered call two strikes in the money 2c) If the previous day's closing price is greater than $150 and days till expiration is greater than 90, you can write a covered call two strikes in the money. "You are likely making an assumption that the ""Short call"" part of the article you refer to isn't making: that you own the underlying stock in the first place. Rather, selling short a call has two primary cases with considerably different risk profiles. When you short-sell (or ""write"") a call option on a stock, your position can either be: covered, which means you already own the underlying stock and will simply need to deliver it if you are assigned, or else uncovered (or naked), which means you do not own the underlying stock. Writing a covered call can be a relatively conservative trade, while writing a naked call (if your broker were to permit such) can be extremely risky. Consider: With an uncovered position, should you be assigned you will be required to buy the underlying at the prevailing price. This is a very real cost — certainly not an opportunity cost. Look a little further in the article you linked, to the Option strategies section, and you will see the covered call mentioned there. That's the kind of trade you describe in your example." "If you buy a call, that's because you expect that the stock will go up. If it does not go up, then forget about buying more calls as your initial idea seems to be wrong. And I don't think that buying a put to make up for the loss will work either, the only thing that is sure is that you will pay another premium (on a stock that could stay where it is). Even if you are 100% sure that the stock will go up again, don't do anything, as John Maynard Keynes stated: ""Markets can remain irrational longer than you can remain solvent"". My idea is: wait until the expiration date. The good things about options is that you won't lose more than the premium that you paid for it and that until it reaches its maturity you can still make money if the market turns around. More generally, when you are purely speculating, adding to a position when it goes against you is called ""averaging down"". I sincerely discourage you to do that : If the stocks goes in the wrong direction, that means that your   initial idea was wrong in the first place (or you were not right at   the right moment). In my opinion, adding up to a wrong idea is not the   right thing to do. When you are losing, just take your loss and don't   add up to your position based on your emotions. On the other hand, adding to your position more when the stock goes in   your direction is called ""pyramiding"" and is, in my opinion, a better   way of doing things (you bought, you were right, let's buy more). But   at some point you will have to take your profits. There are plenty of other stocks on which you can try to invest and the market will still be here tomorrow, there will be other opportunities to make profits. Rushing things by constantly trying to have a position is not a good idea. Not doing anything is also a strategy." You will lose out on your spread, you always pay a spread. Also, if you are looking at a strategy for using stop losses, try taking into account the support lines if you are going long. So, if the stock is on an upward trend but is dropping back from profit taking, your best best is to take a position closest to the next support line. You place your stop just below the support. this will give you the best chance of a winning position as most technical analysts will have looking towards the support as a buy back area. Obviously, in a bear market the opposite is true.  If you have taken your position and the market move past the first resistance line, then bring your stop to just below that line as once resistance is broken, it then becomes support. You then have a profitable position with profit locked in. Leave the position to break the next resistance and repeat. "If the stock is below its purchase price, there is no way to exit the position immediately without taking losses. Since presumably you had Good Reasons for buying that stock that haven't changed overnight, what you should probably do is just hold it and wait for the stock to come back up. Otherwise you're putting yourself into an ongoing pattern of ""buy high, sell low"", which is precisely what you don't want to do. If you actually agree with the market that you made a mistake and believe that the stock will not recover any part of the loss quickly (and indeed will continue going down), you could sell immediately and take your losses rather than waiting and possibly taking more losses. Of course if the stock DOES recover you've made the wrong bet. There are conditions under which the pros will use futures to buffer a swing. But that's essentially a side bet, and what it saves you has to be balanced against what it costs you and how certain you are that you NOW can predict the stock's motion. This whole thing is one of many reasons individuals are encouraged to work with index funds, and to buy-and-hold, rather than playing with individual stocks. It is essentially impossible to reliably ""time the market"", so all you can do is research a stock to death before making a bet on it. Much easier, and safer, to have your money riding on the market as a whole so the behavior of any one stock doesn't throw you into a panic. If you can't deal with the fact that stocks go down as well as up, you probably shouldn't be in the market." You sold a call, and have a risk if the stock rises.  You bought a put and gain when the stock drops. You, sir, have a synthetic short position.  It's Case 3 from your linked example: Suppose you own Long Stock and the company is going to report earnings   but you’re going on vacation. How can you hedge your position without   selling your stock? You can short the stock synthetically with   options! Short Stock = Short Call + Long Put They conclude with the net zero remark, because the premise was an existing long position. A long plus this synthetic short results in a neutral set of positions (and the author's ability to go on vacation not concerned about any movement in the stock.) "One alternative strategy you may want to consider is writing covered calls on the stock you have ""just sitting there"".  This will allow you to earn a return (the premium from the calls) without necessarily having to give up your holding. As a brief overview, ""options"" are derivatives that give the holder the right (or option) to buy or sell shares at a specified price.  Holders of call options with a strike prike $x on a particular security have the right to purchase that security at the strike price $x.  Conversely, holders of put options with a strike price of $x have the right to sell that security at the strike price $x.  Always on the other side of a call or put option is a person that has sold the option, which is called ""writing"" the option.  If this person writes a call option, then he will be obligated to sell a certain amount of stock (100 shares per contract) at the strike price if that option is exercised.  A writer of a put option will be obligated to by 100 shares per contract at the strike price if that option is exercised. Covered calls involve writing call contracts on stock that you own.  For example, say you own 100 shares of AAPL, and that AAPL is currently trading for $330.  You decide to write a Jan 21, 2012 call on these shares at a strike price of $340, earning you a premium of say $300. Two things can now happen: if the price of AAPL is not at least $340 on January 21, then the options are ""out of the money"" and will expire unexercised (why exercise an option to buy at $340 when you can buy at the currently cheaper market price?).  You keep your AAPL stock plus the $300 premium you earn.  If, however, the price of AAPL is greater than $340, the option will be exercised and you will now be required to sell the shares you own at $340.  You will earn a return of $10/share ($340-$330), plus the $300 premium from the call option.  You still make out in the end, but have unfortunately incurred an opportunity cost, as had you not written the call option you would have been able to sell at the market price, which is higher than the $340 strike price. Covered calls are considered relatively safe and conservative, however the strategy is most effective for stocks that are expected to stay within a relatively narrow price range for the duration of the contract.  They do provide one option of earning additional money on stocks you are currently holding, albeit at the risk of giving up some returns if the stock price rises above the strike price." "Here are some things to consider if you want to employ a covered call strategy for consistent returns. The discussion also applies to written puts, as they're functionally equivalent. Write covered calls only on fairly valued stock. If the stock is distinctly undervalued, just buy it. By writing the call, you cap the gains that it will achieve as the stock price gravitates to intrinsic value. If the stock is overvalued, sell it, or just stay away. As the owner of a covered call position, you have full exposure to the downside of the stock. The premium received is normally way too small to protect against much of a drop in price. The ideal candidate doesn't change in price much over the life of the position. Yes, this is low volatility, which brings low option premiums. As a seller you want high premiums. But this can't be judged in a vacuum. No matter how high the volatility in absolute terms, as a seller you're betting the market has overpriced volatility. If volatility is high, so premiums are fat, but the market is correct, then the very real risk of the stock dropping over the life of the position offsets the premium received. One thing to look at is current implied volatility for the at-the-money (ATM), near-month call. Compare it to the two-year historical volatility (Morningstar has this conveniently displayed). Moving away from pure volatility, consider writing calls about three months out, just slightly out of the money. The premium is all time value, and the time value decay accelerates in the final few months. (In theory, a series of one-month options would be higher time value, but there are frictional costs, and no guarantee that today's ""good deal"" will be repeatable twelve time per year.) When comparing various strikes and expirations, compare time value per day. To compare the same statistic across multiple companies, use time value per day as a percent of capital at risk. CaR is the price of the stock less the premium received. If you already own the stock, track it as if you just bought it for this strategy, so use the price on the day you wrote the call. Along with time value per day, compare the simple annualized percent return, again, on capital at risk, measuring the return if a) the stock is called away, and b) the stock remains unchanged. I usually concentrate more on the second scenario, as we get the capital gain on the stock regardless, without the option strategy. Ideally, you can also calculate the probability (based on implied volatility) of the stock achieving these price points by expiration. Measuring returns at many possible stock prices, you can develop an overall expected return. I won't go into further detail, as it seems outside the scope here. Finally, I usually target a minimum of 25% annualized if the stock remains unchanged. You can, of course, adjust this up or down depending on your risk tolerance. I consider this to be conservative." "It would be useful to forget about the initial price that you invested - that loss happened, it's over and irreversible, it's a sunk cost; and anchoring on it would only cause you to make worse decisions. Getting ""back"" from a loss is done exactly the same as growing an investment that didn't have such a loss. You have x units of stock that's currently priced $46.5 - that is your blank slate; you need to decide wether you should hold that stock (i.e., if $46.5 is undervalued and likely to increase) or it's likely to fall further and you should sell it.   The decision you make should be exactly the same as if you'd bought it a bit earlier for $40." Two ways to mitigate this risk are to buy a put at a lower premium to the written call, or manage your trade by buying back your call if you see the underlying price going against you - a bit similar to having a stop loss. The principle behind the advice to not throw good money after bad is better restated in economics terms: sunk costs are sunk and irrelevant to today's decisions.   Money lost on a stock is sunk and should not affect our decisions today, one way or the other.  Similarly, the stock going up should not affect our decisions today, one way or the other.  Any advice other than this is assuming some kind of mispricing or predictability in the market.  Mispricings in general cannot be reliably identified and stock returns are not normally predictable. The only valid (efficient markets) reason I know of to allow money you have lost or made on a stock to affect your decision today is the tax implications (you may want to lock in gains if your tax rate is temporarily low or vice versa).