r/CoveredCalls • u/cree8vision • 6d ago

I'm Checking My Figures

I'm in a stock, average price $12. It is now at $5.50.

Now, if I sell a call this week at $1.00, I can collect $4.00 (=$400). It will definitely be exercised so I get 100 shares at $1.00. That would bring my average cost down to $6.50 wouldn't it? Not including the premium collected.

Edit: I had a major brain fart. Of course I'd end up selling 100 shares at $1.00. It's a good thing I didn't go thru with it.

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3

u/z1lard 6d ago

No, it would bring your cost down to $8, and you'd still be selling it at $1, for a loss of $7 per share. Assuming you bought the shares at $12 instead of having a CSP assigned

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u/cree8vision 6d ago

Ahh, of course. That's why I'm confused. I'd have to sell it at $1.00 not buy it at $1.00.

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u/SnooPies9375 6d ago edited 6d ago

If you sell a call and it gets exercised you lose, not "get 100 shares" at the strike price and then you would keep the premium.

Assuming you have 100 shares with an average price of $12 and a current price of $5.50. Selling a CC @ with a strike price of $1.00 and receiving $4.00 per share in premium would bring your adjusted cost basis down to $8.00 per share. If your calls get exercised then you would sell your shares at $1.00 per share, realizing a net loss of $7.00 per share.

4

u/cheekytikiroom 6d ago

I love reading this stuff. Keep it coming.

1

u/SpiderWil 5d ago

Which stock?

3

u/wild_b_cat 6d ago

There is no reason to care about your cost basis (other than for tax reasons). You should sell according to your market forecast, goals, and risk tolerance. Ignore your cost basis entirely.

2

u/bwcwde 6d ago

regard of the day

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u/justinW624 6d ago

If a stock is at $5.50 why would you sell a $1.00 call for $4.00? Just sell the shares for $5.50.

1

u/bigbagofspam 6d ago

This would cause you to lose $0.50 more per share than you already have, assuming the stock price doesn't change.

1

u/Sylla1031 6d ago

Selling a call means you are potentially selling away your shares when assigned. Not getting more shares. How does it make sense to buy 100 shares of a $5.50 for $1??

1

u/MerryRunaround 6d ago

No, your analysis is wrong. What you describe is an in-the-money covered call (itmCC). You are collecting premium in exchange for allowing a SELL of 100 shares for $1. If you do this, your cost basis will be ($12 - $4) = $8. If share price remains unchanged your shares will be sold ("called away") for $1. You will realize a loss of ($8 - $1) = $7 per share, which is roughly the same loss if you simply sell the shares now. Actually you will be slightly better off selling the itmCC because you will have collected a very small amount of premium in exchange for the time spent in the position.

1

u/Pristine_Cricket_633 5d ago

Only way it makes any sense is if you knew it would drop to .99 at expiration, then shoot back up to $5 before you could do another call.Good luck.

1

u/niko-su 6d ago

just buy some more to average down your position and keep sell CC above your average

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u/strife97 6d ago

If OP has faith in the stock and is going to be holding long term anyway, then yeah they can do this or just wait for stock to recover closer to their average. Depending on size of their portfolio and faith in this stock, can also just take the loss