This past Monday, March 28th I sold 50 contracts of Naked Calls on U.S. Steel (X). When I sold the Calls the stock was at $15.65. Hit this link and you will go to the post I made when I sold the Calls, “U.S. Steel Naked Calls.” The 50 Naked Call contracts is an option for someone to buy 5000 shares of U.S. Steel at my Strike Price of $16.50. If the stock gets up to $16.50 I’ll have to deliver 5000 shares to the buyer of my option. The buyer paid me a premium of $.30 per share to have the right to buy the 5000 shares. The total premium was $1500, which is already in my mattress. Since Monday the market has been going up and U.S. Steel has been following along. This morning the stock went up to $17.04. This had me very concerned because I have to deliver the stock at $16.50 and I do not own the stock to deliver. Remember I sold a Naked Call. Tomorrow is Expiration Day, so if the stock stayed at $17.04 I would have to buy the stock at $17.04 and deliver it for $16.50. I would lose $.54 on the stock, 5000 shares. Thats $2700! As I write this the market is up but U.S. Steel dropped back down to $16.45. I do not want to own U.S. Steel but I decided to play it safe while I had the opportunity to buy the stock at $16.45. Now if the stock goes up I have a Covered Call and I have the stock to deliver at $16.50. If the stock stays above the Strike Price of $16.50 and I get assigned, not only would I have the stock to deliver but I would make $.05 on the stock. That will be $250 in addition to the premium of $1500. I am hoping the stock goes up and I get assigned. If the stock stays below the Strike Price on Expiration Day, I’ll sell more Calls next week. Here’s the order to buy the stock:
Buy 5000 shares X @ $16.45
This sort of thing happens all the time when trading options. It would have been nice if U.S. Steel never approached the Strike Price of $16.50 and the option expired, but it did get to $16.50 so you have to make adjustments to your position. Trading is never a smooth road! You always hit potholes and other road hazards. When it happens you have to make detours and take a different road. You must watch your positions and be ready to make quick moves. Which is what I did in this situation.
Originally I gave the Naked Call trade a Risk Factor of 4 but now that I Covered my position I change the Risk Factor to a 1. It is now a Covered Call. A very low risk position.
It’s very important to understand Naked Calls. Make sure you read the links below.
U.S. Steel Naked Calls – this is the post from the sale of the option.
Steve
The Options Coach