right on，was deciding which msft calls to but and this came in.
thx Sam
Alex Klap
January 30, 2025 1:21 pm
what do we do if we cannot Sell to Open due to “Your order will leave your account with an uncovered option position in cash. Please review your order.” I have tried upgrading my options tier to level 2 in Fidelity, but they won’t let me due to not having enough experience trading options
Still. I think this is the framework here. In the future, once Baratheon reaches a higher capital level, the plan will be to buy 2 contracts and then sell 1 to reduce risk as an alternative to hedging.
Hedging just simply reduces down your risk. You an accomplish that same goal to a substantial degree by reducing exposure.
So our plan will be to do the “best overall strategy” first:
(1) Hedge through the sale of calls when such actions are superior. They aren’t always superior. Often buying a put is FAR greater in terms of risk reduction.
(2) Hedge through the purchase of puts when the situation calls for it.
(3) Sell half
(4) Sell all
That’s sort of the way to approach risk reduction. I think this is a really important issue that seems to come up again and again.
So I can tell you that if in Baratheon we were limited, we’d close out our position before Apple reports. Because it would leave us too exposed. If we can’t hedge, then we’d sell. Capital preservation has to come first. Profit second.
Call your broker and ask them to advise you on how you can hedge without selling calls against your position.
Puts are an alternative approach. But the problem with puts is that it’s too expensive and the minute Apple reports, if it doesn’t roll over enough, you lose both on the call side and on the put side.
Puts offer one method of protection.
Selling covered calls or premium against a position as the case may be is another way.
A third way is by selling half a position. Reducing exposure.
If we can’t find an appropriate put to protect us and if we can’t sell covered calls to protect us, then we have to sell half.
if we can’t can’t sell, then we’d sell the position.
We don’t need to do anything. The April calls we sold created an Apple $220 – $250 call spread. We want to Apple to close above $250, April. If that happens, we make $30 on one contract on a six dollar investment. Essentially we make $2400 in gains on a $600 purchase as long as Apple closes north of 250.
if Apple doesn’t close above 250 then we get to collect the $650 we sold in premium. Basically we do nothing for now. We just wait and see how the stock trades between now and April.
We’re in a good spot. Same with Targaryen. For the Targaryen spread we just want Apple to close above 240. If that happens, we succeeded on a pretty sizable trade relative to the portfolio
Thanks for your explanation. I’m not very familiar with call spreads, and I was wondering if there’s a chance I could be assigned on the short leg (AAPL $250 covered call) if AAPL goes above $250.
There is. It’s extremely rare and it’s never happened to me in 25 years. Each broker deals with it differently. I can tell you that if the option holder were to exercise their option while Apple is trading this far below $250 (at $240), you’d make a windfall.
You should ask your broker how they deal with early assignments when you’re holding a vertical call-spread.
Some brokers force you to exercise the long side. Some brokers will just give you the short shares — since you sold Apple without shares to give — and then you’ll have to cover that position. No problem with a low volatility stock like Apple. You just close it out.
Sometimes the broke handles the entire process automatically. Meaning, they will assign you short shares and instantly cover for you.
I do think it is critically important that each person knows how their brokers deal with early assignments on the short leg of a vertical call-spread.
I can also tell you that vertical call-spread are probably most popular options strategy and there’s likely no real risk here.
The positions off-set each other. Just play out all the math. You have long contracts that back up the short contracts. We’re not naked short here.
We own the $220 calls. Imagine if Apple is at $258 and you’re early assigned. Worst case the broker forces you to buy the shares at $220 by exercising the long contract and then sell them to the exercisee at $250. That’s a $30 profit x the # of shares not to mention the premium you already collect ($6.50). That premium you got for reselling the options is yours already. it’s what you get for selling that right to exercise. So that’s added on top of the profit.
Basically it’s $36.50 (if forced to exercise) minus the $12.95 we paid to buy the $220’s. $36.50 – $12.95 = profit on the trade i.e. $23.55.
What’s $23.55 + $6.45 (our cost to buy the spread)? $30.00.
So if a person were to early exercise, it essentially means you get your full profit right away. The spread’s maximum value is $30. Our maximum profit if we held until expiration is $23.55 right now. Thus, early exercise and assignment = immediate full spread value.
By
/ January 30, 2025 
right on，was deciding which msft calls to but and this came in.
thx Sam
what do we do if we cannot Sell to Open due to “Your order will leave your account with an uncovered option position in cash. Please review your order.” I have tried upgrading my options tier to level 2 in Fidelity, but they won’t let me due to not having enough experience trading options
Nvm. I actually don’t have this position. Must have missed a trade in Baratheon. Oh well, I already have enough exposure to AAPL in other portfolios
Still. I think this is the framework here. In the future, once Baratheon reaches a higher capital level, the plan will be to buy 2 contracts and then sell 1 to reduce risk as an alternative to hedging.
Hedging just simply reduces down your risk. You an accomplish that same goal to a substantial degree by reducing exposure.
So our plan will be to do the “best overall strategy” first:
(1) Hedge through the sale of calls when such actions are superior. They aren’t always superior. Often buying a put is FAR greater in terms of risk reduction.
(2) Hedge through the purchase of puts when the situation calls for it.
(3) Sell half
(4) Sell all
That’s sort of the way to approach risk reduction. I think this is a really important issue that seems to come up again and again.
Got it. Thank you, Good Sir
So I can tell you that if in Baratheon we were limited, we’d close out our position before Apple reports. Because it would leave us too exposed. If we can’t hedge, then we’d sell. Capital preservation has to come first. Profit second.
Call your broker and ask them to advise you on how you can hedge without selling calls against your position.
Puts are an alternative approach. But the problem with puts is that it’s too expensive and the minute Apple reports, if it doesn’t roll over enough, you lose both on the call side and on the put side.
Puts offer one method of protection.
Selling covered calls or premium against a position as the case may be is another way.
A third way is by selling half a position. Reducing exposure.
If we can’t find an appropriate put to protect us and if we can’t sell covered calls to protect us, then we have to sell half.
if we can’t can’t sell, then we’d sell the position.
^This is how Baratheon would trade it.
Thank you for these possibilities to consider.
I filled MSFT at 18.80 and 19.30, not the best. I waited for this second lot and it only got worse.
AAPL just popped up, how do you manage the covered call now? Can I just buy it back for a minor loss instead of waiting until expiration?
We don’t need to do anything. The April calls we sold created an Apple $220 – $250 call spread. We want to Apple to close above $250, April. If that happens, we make $30 on one contract on a six dollar investment. Essentially we make $2400 in gains on a $600 purchase as long as Apple closes north of 250.
if Apple doesn’t close above 250 then we get to collect the $650 we sold in premium. Basically we do nothing for now. We just wait and see how the stock trades between now and April.
We’re in a good spot. Same with Targaryen. For the Targaryen spread we just want Apple to close above 240. If that happens, we succeeded on a pretty sizable trade relative to the portfolio
Thanks for your explanation. I’m not very familiar with call spreads, and I was wondering if there’s a chance I could be assigned on the short leg (AAPL $250 covered call) if AAPL goes above $250.
There is. It’s extremely rare and it’s never happened to me in 25 years. Each broker deals with it differently. I can tell you that if the option holder were to exercise their option while Apple is trading this far below $250 (at $240), you’d make a windfall.
You should ask your broker how they deal with early assignments when you’re holding a vertical call-spread.
Some brokers force you to exercise the long side. Some brokers will just give you the short shares — since you sold Apple without shares to give — and then you’ll have to cover that position. No problem with a low volatility stock like Apple. You just close it out.
Sometimes the broke handles the entire process automatically. Meaning, they will assign you short shares and instantly cover for you.
I do think it is critically important that each person knows how their brokers deal with early assignments on the short leg of a vertical call-spread.
I can also tell you that vertical call-spread are probably most popular options strategy and there’s likely no real risk here.
The positions off-set each other. Just play out all the math. You have long contracts that back up the short contracts. We’re not naked short here.
We own the $220 calls. Imagine if Apple is at $258 and you’re early assigned. Worst case the broker forces you to buy the shares at $220 by exercising the long contract and then sell them to the exercisee at $250. That’s a $30 profit x the # of shares not to mention the premium you already collect ($6.50). That premium you got for reselling the options is yours already. it’s what you get for selling that right to exercise. So that’s added on top of the profit.
Basically it’s $36.50 (if forced to exercise) minus the $12.95 we paid to buy the $220’s. $36.50 – $12.95 = profit on the trade i.e. $23.55.
What’s $23.55 + $6.45 (our cost to buy the spread)? $30.00.
So if a person were to early exercise, it essentially means you get your full profit right away. The spread’s maximum value is $30. Our maximum profit if we held until expiration is $23.55 right now. Thus, early exercise and assignment = immediate full spread value.