Options Trading Tutorial

as for covered call, why was my stock not bought even the stock price is far beyond the strike price ?

is there a solution to avoid the stock is being locked (can not be sold by stock holder) when stock price is far beyond the strike price and the option premium is too high to buy back ? Thanks

Public Comments

1. Yes. You wait until the expiration date, when the time premium goes to zero. Then stock will get called. If you really want to sell the stock, you can hedge the position by buying another call at a different price. You might also buy a put to protect against a price drop before expiration.
2. <<<as for covered call, why was my stock not bought even the stock price is far beyond the strike price ?>>> Call options are rarely exercised early unless the underlying stock is about to go ex-dividend and the dividend is substantial. There is no incentive for the holder of a call option to exercise it early. <<<is there a solution to avoid the stock is being locked (can not be sold by stock holder) when stock price is far beyond the strike price and the option premium is too high to buy back ?>>> If you have a margin account you can use what is known as a "spread order" to close both the stock and the option position simultaneously. Since the stock price will be higher than the option price you will get enough from the sale of the stock to pay for the option, If you have a cash account I am not sure your brokerage would allow you to use the funds from the stock sale to pay for closing the option options. The reason is that option transactions settle on day T+1 while stock transactions settle on day T+3, That means you would owe the money to pay for the options two days before you received the money from the sale of the stock. You would have to check with your broker before entering that trade. One thing you could probably do in a cash account is roll the option position to a nearer expiry. For example, if the option you sold was had a January, 2010 expiry you could roll that option to a February, 2009 option with the same strike price. That would cost you some money, but not nearly as much as just closing the January, 2010 option. Example: Assume the option you had sold was a January, 2010 call with a strike price of $40 and the stock is now trading at $60. You could place a spread order to buy the January, 2010 $40 call and sell the February, 2009 $40 call. Depending of the volatility of the underlying stock this could cost less than $1 per share or more than $10 per share, but since the option expires in less than four weeks it will be exercised or expire in less than four weeks.
3. If the buyer exercises it early, he loses the time value built into the price. If you want to sell the stock, you have to buy the call back. It's really not too expensive to buy back. It's just reflecting the loss you will hae to take sooner or later anyway.