I currently own a little over 500 shares of a stock which represents a hefty on-paper loss for me. I don't want to liquidate the position. I think that long term, the stock may come back up as in the past year it has gone from super horrible. There might be some speculation and sans-the market up and down spikes, it seems on track to go up, but not enough for me to make a profit.

I don't trade options in general, but I think this would be a good place to start. I was thinking I would sell the call for a higher price to earn the premium. I could then part with the share if the stock was in the money, but I don't think it will quite get to the strike price in the next few months.

My questions are therefore, is this a reasonable strategy (collect the premium now, take a risk that I may have to sell, but still I'd be selling at less of a loss than if I sold today)? And, how exactly does this work with an online broker (TDA in this case). Do I just put in the order correctly, and if the strike hits before expiration they grab the shares out of my portfolio, if not I keep my shares? I want to make sure I am using the right strategy and exactly how it will work once executed. T

  • In your title, you say that the market thinks it will go up, but in the actual question, you say you think it will go up. This will be a profitable thing to do only if the probability of it going up is larger than what the market thinks the probability is, so this discrepancy between your title and question is rather crucial. – Acccumulation Aug 10 '18 at 15:24
  • Consider the other directional risk - if the price goes down more than the premium you earn, you will end up with less money than if you simply sold the shares today. – Grade 'Eh' Bacon Aug 10 '18 at 20:20

What you are proposing is called a "covered call" strategy. It is a perfectly reasonable speculative play on how far the stock will move within a certain amount of time. If your belief that the stock's volatility is such that it is unlikely to reach the strike price before the maturity is greater than the markets (which it seems it is), then go ahead and sell the call.

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You seem to have it right. You will be selling what's known as a covered call. When you sell the call, you enter it as "sell to open" and the system should see that you own the stock. You need to be approved for options trading, not all accounts are.

As far as this particular trade goes - No, the stock doesn't necessarily get called away the day it's in the money, but it can be. If the stock closes just in the money around the time of expiration are you ok will selling it for the strike price? Remember, the option buyer is taking a small risk, the cost of this option, hoping the stock will go far above that price.

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  • Its been a big loss and (correct me if I'm wrong) I can use it to offset gains at tax time. So I would initiate a "sell to open" and it would note that I already own the shares. Is my trade then matched to a specific seller? Or, do I get my premium as soon as I execute the order - does there actually have to be a "specific" buyer? I am okay actually parting with the shares for the risk on the premium in this case. I understand how options work if I think about them for a long time, just how they actually execute is a mystery. – Eric G Sep 28 '11 at 21:03
  • You sell to open. But between the time you do this and the stock is called (or expires), the option itself can be traded. This is transparent to you. Yes, the loss is still a loss, offset by your option premium if the stock is called away. – JTP - Apologise to Monica Sep 28 '11 at 21:12

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