I’m trying to understand different scenarios with a covered call, please correct me if I’m getting this wrong. 1. Writing 1 call option on AMZN with a long position in 100 shares. The call is eventually in the money and is exercised. Your 1,000 shares get called.
- Writing 1 call option on AMZN with a long position in 50 shares. Since you don’t have 100 shares to deliver if they are called, writing this call option would require margin. If the call is in the money, the broker buys 50 shares at the current market price and sells to the long call position at the strike price (the difference coming out of your margin account). You also pay interest on the margin account for the amount borrowed. This is risky as hell.
- Long 100 shares, short 1 call (1 contract = 100 shares as underlying).
@ T0, Buy stock ( - cash) ; Sell call ( + Cash, the option price)
@ T (expiry, or before, in the case of American options). If calls in the money, deliver stock, receive cash (K, the strike)
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@ T0, Buy stock ( - cash) ; Sell call ( + Cash, the option price)
@ T (expiry, or before, in the case of American options). Deliver 100 stocks (account is now short 50 shares. You do NOT pay margin per say, you pay SBL instead ie the cost of borrowing the stock from the guy who is originally long (and unrelated to the call buyer). SBL on an easy to borrow name like AMZN is very low, typically 1% annually or less.
Note: You could also choose to BUY the 50 shares rather than borrow them. Example: AMZN call strike 1500. You are long 50 shares. Spot @ 1600. You get exercised. Deliver your 100 lots, you receive 100 * 1500 = 150k, then you buy 50 shares @ 1600, for a cash outlay of 80 k.