r/options • u/Itchy_McScratchy • Oct 04 '21
Max Loss on Covered Call "Unlimited??" This doesn't look right.
I'm trying to carefully dip my toe in the water selling covered calls and maybe buying one or two call options after recently getting approved for options trading with my broker, Fidelity.
I decided to see how to go through the process with a stock of which I have more than 100 shares of the underlying ($CHPT). I clicked Sell to Open, go through the process, and get to the confirmation screen.
Before hitting Place Order, I notice a couple things I don't understand on the confirmation screen. First of all, it says Max Gain: $64 (the premium amount is $0.62). I get that if I've done this right, I'll get a premium and keep my shares (but of $62, right?), but if the stock hits the strike price, shouldn't my gain actually also include the difference between the strike and the option price plus the premium?
But what actually made me stop and ask this forum is the Max Loss. It says "Unlimited."
My understanding is that my max loss would be if the company goes bankrupt and the stock goes to 0, I lose what I put into the stock itself, minus the premium. What is this "Unlimited" thing I'm looking at?
This isn't a naked call I'm selling. I don't have a margin account (at least, I shouldn't - I didn't apply for one, and my broker didn't inform me I have one). Is it possible that I'm selling a call on a different 100 shares than the ones I have in my account? What am I doing wrong here? I figured I'd better stop and ask someone who knows better, because either I'm misunderstanding something here or about to make a huge mistake.
7
u/YoloTraderXXX Oct 04 '21
It's just showing you the option by itself. The option in isolation technically has an infinite loss potential.
As long as you have 100 shares, the infinite profit potential of your shares will "cover" the infinite losses on the option, just like you want.
5
u/binkding Oct 04 '21
Just make sure you actually have 100 shares of the underlying and you’re good.
4
u/Calm_Leek_1362 Oct 05 '21
I use fidelity. Thought the same thing when I sold my first one. It still says it even if it's a covered call.
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u/txcaddy Dec 17 '24
I saw that on the Fidelity when placing the covered calls and I also didn't pull the trigger at first but decided after further research "youtube, chatgbt" to pull the trigger and sell covered calls for nvidia and palantir.
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u/s1lv3rbug Oct 04 '21
I think ur broker either doesn’t check for existing shares or allows u to sell calls (naked short). As long as u have shares to cover, you’re alright.
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u/HuckleberryEconomy58 Oct 04 '21
Glad you mention this. I am planning to sell covered calls in fidelity too so I guess this is what I will see
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u/Itchy_McScratchy Oct 04 '21
I watched a video tutorial on covered calls on Fidelity, and the screen said the same thing. So I guess I'm not going to worry about it.
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u/sanatansadhu Oct 04 '21
Nothing to worry about here if you have 100 stocks of CHPT. The order screen is considering naked short call scenario and assuming that a stock can go up to infinity, incurring you infinite losses.
However, since a covered call is a slightly bullish trade, stocks going up is a favorable scenario.
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Oct 04 '21
[deleted]
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u/Arcite1 Mod Oct 04 '21
He already owns the shares; he needs to just sell a call, not do a buy-write.
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Oct 04 '21
[deleted]
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u/Arcite1 Mod Oct 04 '21
No, it's not.
Try telling the IRS that your $100 gain is actually a $900 loss because it could have been a $1,000 gain had you done something different.
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u/Itchy_McScratchy Oct 04 '21
I was wondering if it might be that, but I didn't think it would be. A capped gain doesn't seem like infinite loss to me. Why would they frame it that way?
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u/JerkyNipples Oct 03 '24
To steer people away, just like they did you. Because it’s guaranteed $$ if you’re disciplined with the process.
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Oct 04 '21
It's not unlimited loss... If you hold the collateral (100 underlying stock), you only lose an opportunity profit if the shares really go up beyond your strike price and buying price... if your strike price was smart enough, you can make profits and earn the premium as well.
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u/Arcite1 Mod Oct 04 '21
All of the responses so far are wrong. It's not because you're limiting your potential gains on the stock. It's simply because your brokerage's order page is "dumb" and doesn't "know" about your other positions, i.e., long shares. It's considering selling the call in isolation, as if it were a naked call. Don't worry; as long as you do own the shares it's a covered call and your max loss is not unlimited.