"What Happens To My Covered Call On Citigroup?"

"What Happens To My Covered Call On Citigroup?"

"Hello: I own 500 shares of citi C for $4.00 each. On Feb 6 I wrote a sell to cover call option @42.00 for march 21th $5.00 per contract for 5 contracts. this is what my transation says. call-100 C MAR @ 5 Opening Trans- Covered Mar 21 2009. what I should be doing before March 21TH if the strike price is below $5.00 and if it is above $5.00. I thought I knew what I was doing to protect my investment, But I am now confused? Please reply. Thank you so much."
Asked By Farzin on 23 February 2009

Answered by Mr. OppiE

Hi Farzin,

To reiterate your question, you bought 500 Citigroup (C) shares when it was trading at $4 and then you wrote a covered call against it by selling the March $5 Call Options at $0.42 for a total of $210. You are wondering what is going to happen if C closes above $5 and below $5 upon expiration of the March options, right?

Ok, here's what will happen...

If Citigroup shares close above $5 upon expiration of the March call options, your Citigroup shares will be called away due to the call options being in the money and you would make in profit the rise of the stock up to the strike price of the call options sold + whatever amount you sold the call options for. Which means that you would make a total profit of $500 + $210 = $710. If you do not want your Citigroup shares to be called away, you could Buy To Close those call options on expiration day itself. In fact, if Citigroup shares rises significantly above $5 before expiration, you could also Buy To Close those call options before expiration in order to benefit from further rise in the price of the shares.

If Citigroup shares fail to exceed $5 by expiration of the March call options, those call options would expire worthless and you would pocket the full amount of its premium. In this case, if Citigroup shares closed at $4.50 upon expiration of the March call options, you would pocket the whole $210 premium + the $0.50 profit per share on your Citigroup shares for a total profit of $460.

What this covered call does not do is protect your position should Citigroup shares drop more than the price of the call options that you sold, which in this case is $0.42. In fact, Citigroup shares has dropped $1.77 since 6 February, which means that after offsetting the value of the call options you have sold, you would still be in a loss of about $1.35, which is still better than not having the calls sold in the first place.

In conclusion, Covered Call is a nice way to protect stocks that are may run into slight retreats but is generally expected to go up. If a stock is expected to go up but may also take a plunge, a Married Put should be used instead. Also, never try any options strategies before you have practised them on paper or in a virtual trading account.

Important Disclaimer : Options involve risk and are not suitable for all investors. Data and information is provided for informational purposes only, and is not intended for trading purposes. Neither www.optiontradingpedia.com, mastersoequity.com nor any of its data or content providers shall be liable for any errors, omissions, or delays in the content, or for any actions taken in reliance thereon. Data is deemed accurate but is not warranted or guaranteed. optiontradinpedia.com and mastersoequity.com are not a registered broker-dealer and does not endorse or recommend the services of any brokerage company. The brokerage company you select is solely responsible for its services to you. By accessing, viewing, or using this site in any way, you agree to be bound by the above conditions and disclaimers found on this site.

Copyright Warning : All contents and information presented here in www.optiontradingpedia.com are property of www.Optiontradingpedia.com and are not to be copied, redistributed or downloaded in any ways unless in accordance with our quoting policy. We have a comprehensive system to detect plagiarism and will take legal action against any individuals, websites or companies involved. We Take Our Copyright VERY Seriously!

Site Authored by

Contact Us

Email : [email protected]
Head Office Singapore

Want To Invite Us To Talk or Give Options Seminars?
Please Email Details To: [email protected] and we will get in touch with you ASAP.

Connect With Us