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In addition to the shorts, when people buy call options - doesn't that mean someone else is on the hook to provide shares at a later date, and they might not ho
by cstrat 6y ago
In addition to the shorts, when people buy call options - doesn't that mean someone else is on the hook to provide shares at a later date, and they might not hold them at the time of selling the option?
- pc86 6y agoA lot of calls will be "covered" by whomever wrote the option initially, meaning for each contract they wrote, they hold 100 shares of the underlying security as collateral. I don't know the percentage and my Google skills are failing me, but perhaps someone more familiar with the industry can comment on the ratio of covered v. naked calls. I've written cash-secured puts and covered calls a decent amount as an individual investor, the worst thing that happens is you end up buying something for more than it's worth or selling something for less than it's worth. However, it rarely goes wrong the first time and you've made premium from other options many times over on the same security. If you look up the Wheel or Triple Income options strategy that goes into the specifics of it. It works pretty well for high-volume, stable stocks that you want to own anyway.
- FabHK 6y agoWhen you buy a call from an option trader, you're long the stock, trader is short, so they will buy shares to hedge themselves.
- freeone3000 6y agoThey often do, but they don't have to. You can write an uncovered call, if you're brave or stupid -- after all, worst case you'll just market buy the shares to deliver on the day the option is tendered.
- lazyasciiart 6y agoNo, worst case is nobody is selling shares on that day. Thats the exact scenario wsb is hoping to create.
- freeone3000 6y agoLiquidity providers can always just write share IOUs and find the shares to fill them later. The market running out of stock is not a thing that can actually happen.
- im3w1l 6y agoYeah but it's not like anyone would exercise out of the money options *nervous laughter*. Though theorethically, with enough options it could cause the same effect as a short squeeze, where the exercise drives up the price to make them in the money.
- colechristensen 6y agoYou can sell naked calls. The maximum loss is infinite and so it is hard to get a brokerage to allow you to do this, but it is done. Indeed if the price goes up you are on the hook to buy the shares and deliver them. Calls are commonly either covered by shares you own or in a spread where you buy and sell the same ticker at different prices or dates.