[Covered Call Option]

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Eastcoaster212
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[Covered Call Option]

Post by Eastcoaster212 »

Hi!

Have never done options before, and am trying to execute a covered call option. I'm in need of assistance...

Say I have 100 shares of apple and am going to do a covered call option. I say set the strike price for 130.00, my limit price for 128.00 and the duration for the week. Will there be potentially any profit from this. Im slightly confused....

[Post title reformatted by moderator oldcomputerguy]
OnTrack
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Re: COVERED CALL OPTION

Post by OnTrack »

Eastcoaster212 wrote: Sun Sep 13, 2020 7:40 pm Hi!

Have never done options before, and am trying to execute a covered call option. I'm in need of assistance...

Say I have 100 shares of apple and am going to do a covered call option. I say set the strike price for 130.00, my limit price for 128.00 and the duration for the week. Will there be potentially any profit from this. Im slightly confused....
The last price for AAPL is 112.00.
The bid for a 9/18/2020 AAPL call option with a 130.00 strike price is 0.15, meaning that if you sell 1 contract you would receive $15.00 less any commission or fees. If the option expires before AAPL goes above the strike price, then you will have made $15 and you keep your 100 shares. If the price goes above 130.00, the the option could be exercised and you would have to sell the 100 shares for $130 and you also still keep the $15 that you received when you sold the option. I'm not sure what you mean by a limit price of $128?
ChrisBenn
Posts: 441
Joined: Mon Aug 05, 2019 7:56 pm

Re: COVERED CALL OPTION

Post by ChrisBenn »

Eastcoaster212 wrote: Sun Sep 13, 2020 7:40 pm Hi!

Have never done options before, and am trying to execute a covered call option. I'm in need of assistance...

Say I have 100 shares of apple and am going to do a covered call option. I say set the strike price for 130.00, my limit price for 128.00 and the duration for the week. Will there be potentially any profit from this. Im slightly confused....
Take a look at https://www.optionsprofitcalculator.com/

It gives you an idea of what kind of movement you need in the underlying to turn a profit, as well as the impact of time decay on those profits or losses.
AlphaLess
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Re: COVERED CALL OPTION

Post by AlphaLess »

Eastcoaster212 wrote: Sun Sep 13, 2020 7:40 pm Hi!

Have never done options before, and am trying to execute a covered call option. I'm in need of assistance...

Say I have 100 shares of apple and am going to do a covered call option. I say set the strike price for 130.00, my limit price for 128.00 and the duration for the week. Will there be potentially any profit from this. Im slightly confused....
DONT EVEN TRY THIS.
"A Republic, if you can keep it". Benjamin Franklin. 1787. | Party affiliation: Vanguard. Religion: low-cost investing.
cogito
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Re: COVERED CALL OPTION

Post by cogito »

AlphaLess wrote: Sun Sep 13, 2020 9:55 pm
Eastcoaster212 wrote: Sun Sep 13, 2020 7:40 pm Hi!

Have never done options before, and am trying to execute a covered call option. I'm in need of assistance...

Say I have 100 shares of apple and am going to do a covered call option. I say set the strike price for 130.00, my limit price for 128.00 and the duration for the week. Will there be potentially any profit from this. Im slightly confused....
DONT EVEN TRY THIS.
I mean, as far as options go, selling covered calls is a better idea than selling naked puts, right... what's the worst that could happen?
rockstar
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Re: COVERED CALL OPTION

Post by rockstar »

I've written covered calls against positions I already owned. I collected premiums as income.

I recommend this book:

Understanding Options by Michael Sincere

It covers the how to for executing option trades.
TNWoods
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Re: COVERED CALL OPTION

Post by TNWoods »

Sir, this is a Wendy’s.

TNWoods
countdrak
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Re: COVERED CALL OPTION

Post by countdrak »

If you are anyways looking to sell the stock at a certain price and own the underlying, meaning you have atleast 100 shares (1 contract) you can do covered calls to generate some extra $. If it hits the strike, you will have to sell your stock at that price even if it keeps going higher.

Do not do any naked options without evaluating the risk. Before diving into any option trading please read and understand what you are doing, they have a lot of potential but riskier than just owning stock.
AlphaLess
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Re: COVERED CALL OPTION

Post by AlphaLess »

cogito wrote: Sun Sep 13, 2020 10:02 pm
AlphaLess wrote: Sun Sep 13, 2020 9:55 pm
Eastcoaster212 wrote: Sun Sep 13, 2020 7:40 pm Hi!

Have never done options before, and am trying to execute a covered call option. I'm in need of assistance...

Say I have 100 shares of apple and am going to do a covered call option. I say set the strike price for 130.00, my limit price for 128.00 and the duration for the week. Will there be potentially any profit from this. Im slightly confused....
DONT EVEN TRY THIS.
I mean, as far as options go, selling covered calls is a better idea than selling naked puts, right... what's the worst that could happen?
It's never a good idea to do something that you don't fully understand.

Mathematically, trying to ski down a diamond slope is a better idea than jumping with a jetpack. Yet, I don't do either.
"A Republic, if you can keep it". Benjamin Franklin. 1787. | Party affiliation: Vanguard. Religion: low-cost investing.
Iridium
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Re: COVERED CALL OPTION

Post by Iridium »

Eastcoaster212 wrote: Sun Sep 13, 2020 7:40 pm Hi!

Have never done options before, and am trying to execute a covered call option. I'm in need of assistance...

Say I have 100 shares of apple and am going to do a covered call option. I say set the strike price for 130.00, my limit price for 128.00 and the duration for the week. Will there be potentially any profit from this. Im slightly confused....
What do you mean by limit price? If you place a limit order to sell the options at $128, then they will never sell, so you will never lose nor gain money.
cogito wrote: Sun Sep 13, 2020 10:02 pm
AlphaLess wrote: Sun Sep 13, 2020 9:55 pm
Eastcoaster212 wrote: Sun Sep 13, 2020 7:40 pm Hi!

Have never done options before, and am trying to execute a covered call option. I'm in need of assistance...

Say I have 100 shares of apple and am going to do a covered call option. I say set the strike price for 130.00, my limit price for 128.00 and the duration for the week. Will there be potentially any profit from this. Im slightly confused....
DONT EVEN TRY THIS.
I mean, as far as options go, selling covered calls is a better idea than selling naked puts, right... what's the worst that could happen?
Much of the return in the stock market is made on just a few stocks and on just a few days. The worst thing that can happen is that the iBulb gets announced which causes the stock price to jump by 50%, but OP enjoys almost none of the benefit. Sure, it is still a gain, but OP is keeping all the downside, so over the long term, returns will be substantially clipped. Now, theoretically, over the long term and with average luck, the premium collected will roughly pay for the returns lost. So, theoretically and in the average case, OP will be equally well off (except for the extra taxes and transaction costs); there may even be a small option writer premium in returns. However, nobody goes through life as the average case, particularly in one stock in one lifetime, and it is highly unclear how selling off upside while holding the downside fits with OP's needs.
inbox788
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Re: COVERED CALL OPTION

Post by inbox788 »

Iridium wrote: Sun Sep 13, 2020 10:50 pm
Eastcoaster212 wrote: Sun Sep 13, 2020 7:40 pm Hi!

Have never done options before, and am trying to execute a covered call option. I'm in need of assistance...

Say I have 100 shares of apple and am going to do a covered call option. I say set the strike price for 130.00, my limit price for 128.00 and the duration for the week. Will there be potentially any profit from this. Im slightly confused....
What do you mean by limit price? If you place a limit order to sell the options at $128, then they will never sell, so you will never lose nor gain money.
My broker will probably give me an error trying to sell a 0.15 option for 128.00, or at least ask me if I'm sure that's what I'm trying to do. OP, is that what you're trying to do? Or do you mean to sell it at 0.15?

Every option trade has the potential for profit or loss. Depends. What do think happens at expiration if nothing changes?
flyingcows
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Re: COVERED CALL OPTION

Post by flyingcows »

Eastcoaster212 wrote: Sun Sep 13, 2020 7:40 pm Hi!

Have never done options before, and am trying to execute a covered call option. I'm in need of assistance...

Say I have 100 shares of apple and am going to do a covered call option. I say set the strike price for 130.00, my limit price for 128.00 and the duration for the week. Will there be potentially any profit from this. Im slightly confused....
Not sure I am following your question, based on Friday 9/11 pricing:

The 130 call for AAPL expiring 9/18 had a 0.15 bid and 0.16 ask per contract. Way under your proposed 1.28 limit order (that is per share, net premium recieved is multiplied by 100 for 1 contract) If the price of AAPL went up to $126 on Monday, then the 130 call would probably be much closer to your proposed 1.28 limit order.

Now, if your asking for advice, I would never consider a trade like this where you are selling a short term directional option play prior to an anticipated event, such as the Sept 15th Apple event.
Last edited by flyingcows on Mon Sep 14, 2020 2:49 am, edited 2 times in total.
Grt2bOutdoors
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Re: COVERED CALL OPTION

Post by Grt2bOutdoors »

Eastcoaster212 wrote: Sun Sep 13, 2020 7:40 pm Hi!

Have never done options before, and am trying to execute a covered call option. I'm in need of assistance...

Say I have 100 shares of apple and am going to do a covered call option. I say set the strike price for 130.00, my limit price for 128.00 and the duration for the week. Will there be potentially any profit from this. Im slightly confused....
Then don’t do it. If you want to sell Apple, put a GTC trade with a limit of 130. If it hits you are out at 130. If not, then you still hold it. But for a $15 premium less commission at your broker? What’s your profit? Less than 1bp? What are you trying to gain/lose on this foray?
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
Valuethinker
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Re: COVERED CALL OPTION

Post by Valuethinker »

Eastcoaster212 wrote: Sun Sep 13, 2020 7:40 pm Hi!

Have never done options before, and am trying to execute a covered call option. I'm in need of assistance...

Say I have 100 shares of apple and am going to do a covered call option. I say set the strike price for 130.00, my limit price for 128.00 and the duration for the week. Will there be potentially any profit from this. Im slightly confused....
In the early 1980s options were very popular in my office - a bunch of university computer programmers.

At least one guy was totally wiped out trading options on the Edmonton exchange (in those days you did it by phone) -- might have been the Calgary stock exchange, my memory is weak on that point. He incurred tens of thousands of dollars of debt.

These things are dangerous and I think the consensus here is that if you don't understand it, it is probably not a good strategy?

I realise there are tax issues but if you need to realise capital, isn't just better to sell some of the underlying position?
sbillertpa
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Re: [Covered Call Option]

Post by sbillertpa »

Covered calls are a very conservative investment option — hence the reason they are allowed in HSA’s and IRA’s. I’ve been using them for quite some time as a hedging mechanism for a vaccine stock that I’ve made significant profits in. As mentioned earlier, you need to be okay giving up the underlying shares if the call expires in the money. With a higher volatility stock, the premiums received can be significant. The other technique I use at times is cash secured puts where I sell a put to receive a premium on a stock I want to own long term.
Helo80
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Re: COVERED CALL OPTION

Post by Helo80 »

TNWoods wrote: Sun Sep 13, 2020 10:16 pm Sir, this is a Wendy’s.

TNWoods

But Wendy, it don't go down!
DJZ
Posts: 56
Joined: Fri Jul 03, 2020 6:42 pm

Re: [Covered Call Option]

Post by DJZ »

It’s natural to think of selling way out of the money covered calls as kind of “free money” and I have sold hundreds of these over the past two decades.

Usually, it works out fine. But sometimes there is a sudden run-up in the price of the underlying stock, and you have to either buy back the option at a loss, or sell the underlying stock.

The problem is that options are usually “properly priced” and so they are not free money. I still do it though, for stock that I want to sell.

Overall, though, over my lifetime they have probably been a break even proposition.
ChrisBenn
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Re: [Covered Call Option]

Post by ChrisBenn »

DJZ wrote: Mon Sep 14, 2020 3:43 pm It’s natural to think of selling way out of the money covered calls as kind of “free money” and I have sold hundreds of these over the past two decades.

Usually, it works out fine. But sometimes there is a sudden run-up in the price of the underlying stock, and you have to either buy back the option at a loss, or sell the underlying stock.

The problem is that options are usually “properly priced” and so they are not free money. I still do it though, for stock that I want to sell.

Overall, though, over my lifetime they have probably been a break even proposition.
I would think even if you broke even on a pre-tax basis the stcg (covered call premium) vs potential ltcg (equity appreciation) would put you in the hole?
depressed
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Re: COVERED CALL OPTION

Post by depressed »

cogito wrote: Sun Sep 13, 2020 10:02 pm I mean, as far as options go, selling covered calls is a better idea than selling naked puts, right... what's the worst that could happen?
I know you know this, and you are talking with your tongue in your cheek, but others might read your post without understanding the irony that you intend. So to clarify for those people, these two positions have the same profit/loss profile:

1. Buy 100 shares of stock and sell one covered call.

or

2. Sell one naked put (with the same strike price and expiration date as the covered call).

There can be nuances (involving ex-dividend dates, early exercise, carrying costs, difficulty of unwinding the position or rolling it out, and sometimes arbitrage inequities or other minor points), but to a first approximation, they have the same risk and the same reward.
jello_nailer
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Re: COVERED CALL OPTION

Post by jello_nailer »

depressed wrote: Mon Sep 14, 2020 5:31 pm
cogito wrote: Sun Sep 13, 2020 10:02 pm I mean, as far as options go, selling covered calls is a better idea than selling naked puts, right... what's the worst that could happen?
I know you know this, and you are talking with your tongue in your cheek, but others might read your post without understanding the irony that you intend. So to clarify for those people, these two positions have the same profit/loss profile:

1. Buy 100 shares of stock and sell one covered call.

or

2. Sell one naked put (with the same strike price and expiration date as the covered call).

There can be nuances (involving ex-dividend dates, early exercise, carrying costs, difficulty of unwinding the position or rolling it out, and sometimes arbitrage inequities or other minor points), but to a first approximation, they have the same risk and the same reward.
^ Hi depressed- the way I read cogito post is I think he meant selling a naked call not selling a naked put. Agree with your comment though.
You could also do your #2 above, sell the naked put and also buy a call for a synthetic long position, but you lose the covered call premium for the buy write. You don't have any $$$ tied up with 100 shares of underlying, but you'll owe it if it drops. (You would have anyway if you long stock) all depends on what you are trying to accomplish. Personally, I am comfortable with and generally in this order:
1) Selling covered calls when I own the underlying, to pick up income
2) Selling cash secured puts, to get income on idle cash or lower the basis of something i want to buy
3) No cost collar, to protect a long position when selling is inconvenient or costly.
4) Very rarely would I buy vertical call/put spreads as directional speculation (but I have seen me do it!)
Interesting reading above comments. Just shows everyone has a different situation and view of risk.
DJZ
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Re: [Covered Call Option]

Post by DJZ »

ChrisBenn wrote: Mon Sep 14, 2020 5:21 pm
DJZ wrote: Mon Sep 14, 2020 3:43 pm It’s natural to think of selling way out of the money covered calls as kind of “free money” and I have sold hundreds of these over the past two decades.

Usually, it works out fine. But sometimes there is a sudden run-up in the price of the underlying stock, and you have to either buy back the option at a loss, or sell the underlying stock.

The problem is that options are usually “properly priced” and so they are not free money. I still do it though, for stock that I want to sell.

Overall, though, over my lifetime they have probably been a break even proposition.
I would think even if you broke even on a pre-tax basis the stcg (covered call premium) vs potential ltcg (equity appreciation) would put you in the hole?
They are short term in both cases - the gains usually a long series of very small gains when out of the money calls expire worthless; the losses are infrequent but when they happen are large and are due to having to buy these calls back just before expiration at many times the original price, because the underlying stock rose way more than expected.
ChrisBenn
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Re: [Covered Call Option]

Post by ChrisBenn »

DJZ wrote: Mon Sep 14, 2020 10:28 pm
ChrisBenn wrote: Mon Sep 14, 2020 5:21 pm
DJZ wrote: Mon Sep 14, 2020 3:43 pm It’s natural to think of selling way out of the money covered calls as kind of “free money” and I have sold hundreds of these over the past two decades.

Usually, it works out fine. But sometimes there is a sudden run-up in the price of the underlying stock, and you have to either buy back the option at a loss, or sell the underlying stock.

The problem is that options are usually “properly priced” and so they are not free money. I still do it though, for stock that I want to sell.

Overall, though, over my lifetime they have probably been a break even proposition.
I would think even if you broke even on a pre-tax basis the stcg (covered call premium) vs potential ltcg (equity appreciation) would put you in the hole?
They are short term in both cases - the gains usually a long series of very small gains when out of the money calls expire worthless; the losses are infrequent but when they happen are large and are due to having to buy these calls back just before expiration at many times the original price, because the underlying stock rose way more than expected.

I interpreted your comment as break even vs just holding the underlying - which, if true, disfavors option selling due to taxes.
sbillertpa
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Re: [Covered Call Option]

Post by sbillertpa »

DJZ wrote: Mon Sep 14, 2020 10:28 pm
ChrisBenn wrote: Mon Sep 14, 2020 5:21 pm
DJZ wrote: Mon Sep 14, 2020 3:43 pm It’s natural to think of selling way out of the money covered calls as kind of “free money” and I have sold hundreds of these over the past two decades.

Usually, it works out fine. But sometimes there is a sudden run-up in the price of the underlying stock, and you have to either buy back the option at a loss, or sell the underlying stock.

The problem is that options are usually “properly priced” and so they are not free money. I still do it though, for stock that I want to sell.

Overall, though, over my lifetime they have probably been a break even proposition.
I would think even if you broke even on a pre-tax basis the stcg (covered call premium) vs potential ltcg (equity appreciation) would put you in the hole?
They are short term in both cases - the gains usually a long series of very small gains when out of the money calls expire worthless; the losses are infrequent but when they happen are large and are due to having to buy these calls back just before expiration at many times the original price, because the underlying stock rose way more than expected.
If the stock rises, you already own the underlying shares (i.e., they are covered). When you sell a covered call, you need to be prepared to lose the shares. You can always buy them back if you are a long term holder instead of trying to buy back the call at a higher premium to what you paid. There could be tax implications of losing the shares so that needs to be accounted for before you make the covered call trade in the first place.
Anon9001
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Re: [Covered Call Option]

Post by Anon9001 »

I don't think many people on this board even understand what options are. A covered call or a cash secured put limits your upside on the stock to the options premium while reducing the downside risk by the options premium. They have nearly equal risk as the underlying security. These are not meant to be "safe" in the traditional sense like owning bonds but they are safe in comparison to owning the underlying security. As you can see in the below picutre.
Image

Here is data showing results of Covered Call and Cash Secured Put option against S&P 500. As you can see the risk is reduced slightly compared to the underlying index:https://www.portfoliovisualizer.com/bac ... ion2_2=100

It is not more risky than owning the underlying stock but if you are tempted to do this stragerty just to earn income and you pick stocks which you are bearish on than I suggest you don't it as the options premium is tiny in relation to the down-side risk of the underlying stock.
JackoC
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Re: COVERED CALL OPTION

Post by JackoC »

depressed wrote: Mon Sep 14, 2020 5:31 pm
cogito wrote: Sun Sep 13, 2020 10:02 pm I mean, as far as options go, selling covered calls is a better idea than selling naked puts, right... what's the worst that could happen?
I know you know this, and you are talking with your tongue in your cheek, but others might read your post without understanding the irony that you intend. So to clarify for those people, these two positions have the same profit/loss profile:

1. Buy 100 shares of stock and sell one covered call.

or

2. Sell one naked put (with the same strike price and expiration date as the covered call).

There can be nuances (involving ex-dividend dates, early exercise, carrying costs, difficulty of unwinding the position or rolling it out, and sometimes arbitrage inequities or other minor points), but to a first approximation, they have the same risk and the same reward.
Right but I think the implicit assumption in many cases about options trading is that the person would employ a lot more leverage in a naked short position than covered short position. Hence 'my friends in the 1980's were wiped out on the Calgary exchange' which is kind of WTH? in a discussion of writing covered calls, it requires the unstated assumption of big leverage beyond the investor's owned position.

So rationally speaking you're correct of course, put/call parity (give or take generally minor details related to dividends on american style options, also possible details of margin or whether the trade would be allowed at all in a given account) says own 100 shares and sell at-the-money call on 100 shares is the same as own no shares and sell ATM put on 100 shares, over the same maturity of both options. But 'covered call' anchors the size at the shares you own, preventing the somewhat irrational apples to oranges comparison between dealing in 100 shares owned outright v dealing in 1000 shares underlying naked options positions.

But sure, you'd expect the options to be efficiently priced or even for above-money calls to have some discount to 'fair' value from sellers POV if sell side has a surplus of owners of the stock selling for 'extra yield' and the buy side a surplus of dealers buying and dynamically hedging. The 'fair' value from the hedger's POV includes a return on expenses and capital from that hedging exercise. So it's not 'free money' to sell covered calls. But it can suit a risk/return preference at a given time.
ChrisBenn
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Re: [Covered Call Option]

Post by ChrisBenn »

Anon9001 wrote: Tue Sep 15, 2020 8:54 am (...)
It is not more risky than owning the underlying stock but if you are tempted to do this stragerty just to earn income and you pick stocks which you are bearish on than I suggest you don't it as the options premium is tiny in relation to the down-side risk of the underlying stock.
“Earn Income” seems to be another way of saying “pay stcg instead of ltcg” - that’s my issue.
rockstar
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Re: [Covered Call Option]

Post by rockstar »

Anon9001 wrote: Tue Sep 15, 2020 8:54 am I don't think many people on this board even understand what options are. A covered call or a cash secured put limits your upside on the stock to the options premium while reducing the downside risk by the options premium. They have nearly equal risk as the underlying security. These are not meant to be "safe" in the traditional sense like owning bonds but they are safe in comparison to owning the underlying security. As you can see in the below picutre.
Image

Here is data showing results of Covered Call and Cash Secured Put option against S&P 500. As you can see the risk is reduced slightly compared to the underlying index:https://www.portfoliovisualizer.com/bac ... ion2_2=100

It is not more risky than owning the underlying stock but if you are tempted to do this stragerty just to earn income and you pick stocks which you are bearish on than I suggest you don't it as the options premium is tiny in relation to the down-side risk of the underlying stock.
There is nothing wrong with writing a covered call to collect a premium on an existing position. Having written these in the past, the only anxiety I had was if the stock price started to drop. I felt obligated to hold my position until the option expired, so the premium has to be good enough to warrant writing one in the first place.
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