Prices of securities can go up and down in a few days. The volatility of prices is one of the primary motivations for traders to engage in covered calls. By writing covered call options, a dealer sells the rights to a security, such as a stock, for an agreed price (also referred to as a strike price) at a preset date. In return, the trader is pay for it with a fee that is referred to as premium. However, the premium also implies that the purchaser can own the stock in the future if he or she exercises the option. This usually occurs when the price of the stock becomes higher than its strike price. Like all other investment strategies, covered call transactions have fees with commissions for the person that sells the call, as same as the individual that purchases the stocks.
DR. CHARLES ALLEN, a physician in Palm Springs, Calif., has been using an options strategy called overwriting for about two years. Even following the enormous market meltdown in October, he has continued to participate in the investment program. Overwriting, a strategy long used by institutions, is increasingly being adopted by individual investors. In the wake of the market’s tumble, many people are holding stocks they are reluctant to sell at their reduced values. Overwriting allows them to generate additional revenue on …
QUESTION: When can an option buyer take delivery of the stock from the writer of an option?Can this occur before the expiration date? How does the buyer make contact with the writer to get that transfer going? Can a buyer ever be forced to deliver any stock to a writer? I have been told that the writer has a bigger burden of a possible delivery of the underlying security and that the burden of the buyer is to pay the premium for that investment when that buyer buys that.
There are two different styles of options. "American" options are options that can be exercised at any time during the life of the option. "Europan" style options can only be exercised at maturity. In practice many index options are European style, with a cash settlement at expiry, while most stock options are American style and can be exercised during the life op the option. Options are exercised through the clearing organisation, which is normaly the exchange where you bought the option. You give them an exercise notification and they will randomly select an option writer who will be the counterpart. For the buyer and seller of th eoption this will be completely anonimous. A buyer can not be forced to anything; he holds the rights, while the writer holds the obligations. The buyer only has to pay the exercise or strike price that was determined for the option. You will have paid an option premium to the seller (through the exchange) to reflect that right. The burden is only bigger for the seller if you indeed exercise your right, because the market prices have gone up beyond your strike price (in the case of a call option). In this case you wil buy the stocks cheaper than would have been the case if you had to buy on the open market. But keep in mind that if the price does not move higher than the strike price, there is no point in exercising your right, since it is cheaper to buy the stocks on the market, while the seller can keep his premium as an extra return on his holdings.
that depends on what kind of underlying asset your option on, Stock – yes the delivery can be done before expiration but some index-only upon expiration, No The buyer cannot be forced to take delivery from the writer, however if you do not exercise your option and it is in the money on expiration, the exchange will automatically exercise the option for you. So if you do not want to take delivery, then if the option is in the money, you need to close the position. But if it is not in the money than the option will just expired worthless, writer do not have the right to force you, you have the right as buyer, writer has obligation to fulfill Hope this help Cheers
For normal options, an option buyer can only take delivery at expiration, though this is unusual. There are some option structures out there that allow for delivery before expiration. Ordinarily, the option buyer gets the cash value for the option, which at expiration is the difference between the contract price and the market value of the stock. Then if you use those proceeds to purchase the stock in the open market, it's the same effect as calling away the stock.
Option writer and buyerWhen someone says they’re long a call or short a put. The key thing to remember when you hear these terms is if you’re in the long position then you’re the buyer (owner) of the option. If you’re short in a situation then you’re the seller (writer) of the option. When you’re long a position it means you’re the man who has rights, if you’re short an option then you’ve got a potential obligation. Notice you’re only potentially obligated because if the buyer decides not to exercise his rights by the time the options contract expires then you’re not under any obligation.
The stock market’s collapse on Oct. 19 showed once again the potential volatility of the securities markets. And it demonstrated to thousands of investors around the country that options can be among the most volatile of all instruments in these markets, even for those who use them in conjunction with other strategies. On that day and the days immediately following, options purchasers who had bet that stock prices would rise suffered losses totaling many millions of dollars. The most visible sign …