Do I instantly get buying power after selling covered calls?
Asked 4 years ago
Quick question, if I sell covered calls, then I instantly get new buying power based on the premium I collected and at that point can purchase more shares, right? For example: I spent $1.72 on 3000 shares, so $5,160 30 of them go for $75 each, which amounts to $2,250 (which I collect in premium). Then if ATOS goes to $20 per share, the stock I'm holding could be called away, and if it is, I get $9 per share, which amounts to $27,000. I keep the $2,250 premium I collected, and now I am sitting at $29,250 from the $5,160 investment and $24,090 in profit. But, let’s say ATOS only reaches $7 per share by July 16, then I keep my shares and the $2,250 I collected. If I do that again for another round and the penny stock doesn’t hit the next strike. All my shares are free. If ATOS goes to nothing, the most I would lose is $5,160 minus the $2,250 I collected. So, therefore, the $2,910 would be my max loss on the trade, and I've minimized my risk. However, if I sell calls and take that $2,250, I can buy almost 1,000 additional shares, sell 10 calls on the new shares, and collect $750. I can then buy 300 more shares with that premium and sell 3 more calls, making $225. Now I own 4,300 shares in total and have collected $3,225 in premium on top of it and hold shares worth $13,932. If ATOS never hits over $9 by July 16, then I end up with all my 4,300 shares, keep the $3,225 in premium I collected, and I can start selling covered calls all over again; Taking the $3,225 and buy whatever ATOS is trading at that point and sell calls on the entirety. Is any of my logic out of whack?
Andrew Moran
Sunday, August 29, 2021
Yes, when you sell a covered call, you are paid in exchange for giving up a portion of the future upside.
So, for example, if you are purchasing Acme International stock for $100 per share, thinking it will rise to $120 a share, you might be willing to sell at $110 within three months. Although you concede a short-term profit, this can achieve a modest premium and without downside risk.
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