Check me on calls/puts please

friend said: "Will someone who knows options please check me on the following and comment as required. I'll appreciate it! 1) SELLING a covered CALL at a chosen strike price is an OBLIGATION in return for the premium received to DELIVER 100 shares of the underlying stock upon expiration if the price of the underlying stock is then at or above the strike price and is called. Is that correct? Is there any other time before the expiration date that the underlying stock can be called? (Any expiration day of a prior month, American option, European, etc.) 2) BUYING a covered CALL at a chosen strike price gives the RIGHT in return for the premium paid to call (purchase) 100 shares of the underlying stock upon expiration if the price of the underlying stock is then at or above the strike price. Is that correct? Is there any other time before the expiration date that the underlying stock can be called? 3) SELLING a covered PUT at a chosen strike price is an OBLIGATION in return for the premium received to PURCHASE 100 shares of the underlying stock at the STRIKE price upon expiration if the price of the underlying stock is then at or below the strike price and is exercised. Is that correct? Is there any other time before the expiration date that the underlying stock must be purchased? 4) BUYING a PUT at a chosen strike price is a RIGHT in return for the premium paid to SELL 100 shares of the underlying stock at the strike price upon expiration if the price of the underlying stock is then at or below the strike price. Is that correct? Is there any other time before the expiration date that the underlying stock can be purchased? What is the risk of selling a covered put at a strike price at which you would like to own the underlying stock? The premium is collected and possibly the stock is obtained at an acceptable price, right? What is the downside or anything else I'm missing? Thanks very much! Friend"

prohobo said: "[QUOTE=friend;70128]Will someone who knows options please check me on the following and comment as required. I'll appreciate it! 1) SELLING a covered CALL at a chosen strike price is an OBLIGATION in return for the premium received to DELIVER 100 shares of the underlying stock upon expiration if the price of the underlying stock is then at or above the strike price and is called. Is that correct? Is there any other time before the expiration date that the underlying stock can be called? (Any expiration day of a prior month, American option, European, etc.) [/QUOTE] That is correct, but the stock doesn't have to be at or above. You are OBLIGATED through the life of the option contract. It is possible that they may exercise the option at any time (while unlikely it does happen). The may exercise in the money options to collected the dividend (you need to hold stock to collect the dividend) Formula is simple = Dividend > that premium = exercise. Additionally - in some take over situations, splits, and spin-offs I have seen and have exercised options early (prior to expiration) and yes sometimes OTM options. American options are the only ones that can be exerised prior to expiration, Euro can only be exercised at expiration. That also affects option price (primarly the puts - because of the cost to carry - thus Americans are priced higher than Euros of the same price and time). [QUOTE] 2) BUYING a covered CALL at a chosen strike price gives the RIGHT in return for the premium paid to call (purchase) 100 shares of the underlying stock upon expiration if the price of the underlying stock is then at or above the strike price. Is that correct? Is there any other time before the expiration date that the underlying stock can be called? [/QUOTE] If you own the option you have the right to exercise it and recieve stock (if American) at any time up to expiration. Euro you have to wait until expiration. An Option can be exercised at any time and for any reason. I have seen rather ignorant people early exercised options because they had gone into the money and they want the stock, however their option has a dollar or more of premium in them. That is just throughing away money. I love when I get early exercised on a covered call. If people could guarneetee that my covered-calls would always be exercised - well I would be a billionaire today. [QUOTE] 3) SELLING a covered PUT at a chosen strike price is an OBLIGATION in return for the premium received to PURCHASE 100 shares of the underlying stock at the STRIKE price upon expiration if the price of the underlying stock is then at or below the strike price and is exercised. Is that correct? Is there any other time before the expiration date that the underlying stock must be purchased? [/QUOTE] Selling a put - you are OBLIGATED to take delivery of stock at the strike price. It can be exercised at any time. Front month ITM puts get exercised if they are trading at parity - because of the cost to carry. So expect your ITM front month short puts to get exercised. There are also special reasons (take unders), hard to borrow, and all kinds of special situations (just like calls) that may see options exercised early. [QUOTE] 4) BUYING a PUT at a chosen strike price is a RIGHT in return for the premium paid to SELL 100 shares of the underlying stock at the strike price upon expiration if the price of the underlying stock is then at or below the strike price. Is that correct? Is there any other time before the expiration date that the underlying stock can be purchased? [/QUOTE] You can exercised your option at any time, regardless where it is trading. [QUOTE] What is the risk of selling a covered put at a strike price at which you would like to own the underlying stock? The premium is collected and possibly the stock is obtained at an acceptable price, right? What is the downside or anything else I'm missing? Thanks very much! [/QUOTE] If you get exercised on your short put, you probably didn't want to buy it. Think about these examples. You are short the 40 level put in Lehman, Lehman is currently trading $55. Opps - stock is now trading $2! Did you want to own Lehman at $40? Cause you did. You are short the 15 level put in Kmart (it could never go out of business) - Opps - filed bankruptcy stock is now at 0. Did you want to own Kmart at $15? Cause you did. Your are short the 35 level put in Enron. Opps - going out of business. Did you want to own Enron at $35. Selling naked options is risky, the saying it may be improbable but not impossible is so true when trading this strategy. I am not saying you should NOT do it. I have and will - but managing the risk and capital behind it is important. Expect a 3SD move when you least expect it - and plan around that and you should be managing your risk correctly. Never, think it can't go down, hope it won;t go against you, don't believe it will - as soon as you fall prey to this - it will. As for calls and puts. They are the exact same thing (by using synthetics, a simple stock trade). You can turn a call into a put and a put into a call. Once you start understanding the synthetic relationship it makes life much easier. Good luck"

friend said: "I appreciate your answers and explanations which I'll study and apply. This is exactly what I wanted. Thank you for offering your help to folks like myself that need it. Friend"