How to Handle Selling Calls
Create a new investment to
track the call. When you sell a call, record a sell
transaction in this investment. To keep your total
portfolio value correct, use the default cash account
option to transfer the proceeds of your sell into your
cash investment. While the call is outstanding, update
the call's investment with the price as desired. Since
you will own a negative number of shares in this
investment, as the call price goes down, your total
portfolio value will increase, or as the price goes up,
your portfolio value will decrease.
There are three
possibilities on how the call position will get closed:
- If the call expires,
record a purchase in this investment at a price
of $0/share to close the position.
- If you decide to
repurchase the call, just record the purchase at
the price you paid to buy back the call.
- If the call gets exercised, record a purchase in the call
investment at $0/share, as well as a sell in the underlying stock's
investment at the option price.
Example Call Writing
Assume we own
GM, and would like to sell a Jun 70 call option against
it. Create a new investment (say Jun70.dat) and record
that we sold 100 covered call options (1 contract) at $2
each. These proceeds will be transferred to the default
cash account, so after selling the options, we are still
even, overall. The cash account increased in value by $200,
and the call investment decreased by $200 (-100 shares at
$2/share). Let's assume after 1 month the price of the
option decreases to $1.50. The total portfolio value will
increase by $50, as the cash investment is still up $200,
and the call investment will have a value of -$150, for a
net $50 gain. Assume the option expires in June worthless
because GM did not reach 70. Record a purchase of 100
shares in the call investment at $0/share. The position
is closed, and the portfolio value will have increased by
$200, the amount of our gain.
|