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Still have some options left before they stopped giving them out. Our company's stock hasn't been moving much and I have a year left to exercise. I am thinking of selling equivalent number of calls (i.e. creating a covered call type scenario). Has anybody done this? Any downsides?

One downside that I see is that the company provided options will be in a different account than the account I will be selling the calls - not even the same brokerage - one at ETrade and the other at TD. Obviously, I need an account that will allow me to short on calls - I have that - no issue there. The bigger issue might be if the stock gallops away and triggers a margin call. But my thoughts are that I should be fine. The short obligation would represent about 10% of my brokerage account - i.e. even if the stock doubled (extremely unlikely), I should be well within margin limits.

The only other issue that I can think of is somebody exercising their calls before maturity and on the last day before ex-div. Then in that case, I would be in the hole by the dividend.

(link below to somebody explaining this in more detail)

How to Profit from Employee Stock Options Regardless of Share Performance
 

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Just to add to my previous post. I am now retired. So while I was working for the company, I had restrictions on selling any calls etc. But now that I am retired, I will double check - but I am thinking that I am no longer bound by those rules.

You've described the risks. Why not just exercise and sell a covered call?

why cant u just sell it in same brokerage? that would avoid a lot of problems.

JavaCoder said:   You've described the risks. Why not just exercise and sell a covered call?
  
The math on that doesn't work. In the extreme case, think of the option strike price as the current price. So if you were to exercise, you would come up with all the money to buy the stock which you can do irrespective of the option. While that was the extreme case, I am like 20% in the money. So if I exercise and hold the shares, I would still have to come up with 90% of the stock price since the 20% gain would be taxed at the source. And then I take a big risk - what if the stock collapses. With selling the option, don't have to come up with additional cash and I don't pick up new risk.

UncleJr said:   why cant u just sell it in same brokerage? that would avoid a lot of problems.
  
Not completely true. For one thing, I think the broker won't let me mix company account with personal trades - so effectively, same broker but two different accounts which probably get treated separate by the broker. Also, if the company "frowns" (versus "precludes"), I would rather have them not see any of my shenigans at the same broker.

I am thinking that I can refine my approach a bit and that will take care of the margin call issue if the stock gallops away. With stock trading at $30 today, I was planning to sell $33 call option. My thinking now is sell $33 call option and buy $40 call option. I would lose 15cents per-share on the $40 call but I am getting $1.40 on the $33 call.

You're basically just selling your employee options in another account. I.e.- your employer options are 25 strike calls expiring in XYZ. So go sell 25 strike calls expiring XYZ in the market. At expiry, you'll be long stock in your employer option account and short stock in your brokerage account, having put up purchase money at the former and posted margin at the latter. Then you deliver the employer stock to pay back the short. Early exercise doesn't really matter since you can just exercise your own long option early too. You actually would prefer it since it would allow you to close the whole trade out sooner.

The only reason to do this is if you want to sell the option now and fhe employer account doesn't allow sales, only exercises, and the option has a year to go and significant time value that would be lost in an exercise. Only you can decide if it's worth it. Maybe you have millions of shares.

i am assuming you have no opinion on the stock and just want to capture the fair value of the option right now.

TravelerMSY said:   You're basically just selling your employee options in another account. I.e.- your employer options are 25 strike calls expiring in XYZ. So go sell 25 strike calls expiring XYZ in the market. At expiry, you'll be long stock in your employer option account and short stock in your brokerage account, having put up purchase money at the former and posted margin at the latter. Then you deliver the employer stock to pay back the short. Early exercise doesn't really matter since you can just exercise your own long option early too. You actually would prefer it since it would allow you to close the whole trade out sooner.

The only reason to do this is if you want to sell the option now and fhe employer account doesn't allow sales, only exercises, and the option has a year to go and significant time value that would be lost in an exercise. Only you can decide if it's worth it. Maybe you have millions of shares.

i am assuming you have no opinion on the stock and just want to capture the fair value of the option right now.

  
Not exactly. Employer option strike price may be $25 but I will be selling $33 strike. With stock at $30, I hardly get any option premium to go sell the $25 strike option but with the $33 strike, I still hold onto some upside.

Ok. Now you're just trading, and my scenario doesn't apply. Good luck!

How much stock are we talking? Most places if they will even let you sell naked calls is going to require like 100% margin, So is the gain you make on the cash really going to be that profitable? So you're holding lets say 1000 execiseable shares @ $25 and selling $33's, assuming you get $1sh premium. That brings you in $1000 with $33000 being held "hostage".

Now the other thing to consider is when you get your exercise notice a broker isn't going to wait for you to exercise elsewhere and transfer in shares, they're going to require you to buy or they will end up buying for you. So if the price did go up to land he options ITM you're going to be needing to cover at a loss or worse yet buy shares.

Also I have exercised options early and before the exdiv date.

davef139 said:   How much stock are we talking? Most places if they will even let you sell naked calls is going to require like 100% margin, So is the gain you make on the cash really going to be that profitable? So you're holding lets say 1000 execiseable shares @ $25 and selling $33's, assuming you get $1sh premium. That brings you in $1000 with $33000 being held "hostage".

Now the other thing to consider is when you get your exercise notice a broker isn't going to wait for you to exercise elsewhere and transfer in shares, they're going to require you to buy or they will end up buying for you. So if the price did go up to land he options ITM you're going to be needing to cover at a loss or worse yet buy shares.

Also I have exercised options early and before the exdiv date.


Talking about 6,000 shares - so that would be 6K+ - that is a good piece of change. As I said in a previous post, I could do a spread sell $33 call and buy $40 call - so most margin I should be exposed to is 6,000 * 7 = 42K - which is peanuts for a 500K+ account (assuming I am not over extending myself in multiple directions at the same time).

With respect to early exercise, I am not seeing a problem. 1. Broker will/can wait for exercise somewhere - it is called "being short". (2) Worst case, buy from market in this account and exercise/sell in the other account. The only tricky part might be dealing with 1-day movement of the stock - particularly the dividend differential.
 

PrincipalMember said:    1. Broker will/can wait for exercise somewhere - it is called "being short".
 

  
At least that is what happened in my Roth account. I had a vertical spread and one leg of the spread was assigned. The broker didn't execute the other leg of the spread - it just created a "short" position and I was long the other part of the spread. Since it was a Roth account, it did trigger a margin call.

PrincipalMember said:   
PrincipalMember said:    1. Broker will/can wait for exercise somewhere - it is called "being short".
  
At least that is what happened in my Roth account. I had a vertical spread and one leg of the spread was assigned. The broker didn't execute the other leg of the spread - it just created a "short" position and I was long the other part of the spread. Since it was a Roth account, it did trigger a margin call.

  
You should be careful, margin call only happens when your equity isn't going to be 100%, short selling is prohibited in IRA's. I know I have called in short sells against itm expiring options on a friday evening, but if you hold past settlement your account is going to be illegal. What I have heard is if you go past that settlement period that amount of cash gets "distbursed" to you and will trigger the tax paperwork as pulling out money. if you're planning on doing a 33/40 spreads you're just trading like TravelerMSY said. 

davef139 said:   
You should be careful, margin call only happens when your equity isn't going to be 100%, short selling is prohibited in IRA's. I know I have called in short sells against itm expiring options on a friday evening, but if you hold past settlement your account is going to be illegal. What I have heard is if you go past that settlement period that amount of cash gets "distbursed" to you and will trigger the tax paperwork as pulling out money. if you're planning on doing a 33/40 spreads you're just trading like TravelerMSY said. 
 

  
Roth and IRA accounts have limited margin ability - going short is not allowed as you said. But vertical spreads are allowed in my account. Since vertical spreads are allowed, I can't be the 1st guy running into this problem of somebody exercising one leg of the call and being short and triggering margin. But I understand your tip - will watch things when I go on vacation - much easier to do in the connected world.

With regards to 33/40 spread, without the employer options to back it up, 33/40 spread has a totally different risk/rewards potential than the 25/33/40 thing that I am doing. The 40 piece is to ensure that even if the stock gallops away, the broker doesn't trigger a margin call since he has no visibility on my 25 call. The real action is the 25/33. If the point is that from a broker perspective the 33/40 is like another normal trade, got it - gives me more confidence about moving ahead with it.
 

Finally pulled the trigger today - stock had moved up nicely to around $33.

52 x June contracts - 33/43 spread. Net in pocket $12500
14 x Apr contracts - 33/43 spread. Net in pocket $3200

Total around: $15K - nice piece of change.

curious what is the name of company ?

sandeepg said:   curious what is the name of company ?
  
Why does that matter? The general principle/concept of making such trades is the important thing.

PrincipalMember said:   
JavaCoder said:   You've described the risks. Why not just exercise and sell a covered call?
  
The math on that doesn't work. In the extreme case, think of the option strike price as the current price. So if you were to exercise, you would come up with all the money to buy the stock which you can do irrespective of the option. While that was the extreme case, I am like 20% in the money. So if I exercise and hold the shares, I would still have to come up with 90% of the stock price since the 20% gain would be taxed at the source. And then I take a big risk - what if the stock collapses. With selling the option, don't have to come up with additional cash and I don't pick up new risk.

  
plus if you exercise the options .. you just wasted all the time value of the option you had.



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