Selling a call option
There has been a lot of discussion about selling a call option. I read a good number of explanations but I didn't get clarity on this.
Let's say a stock is trading at per share and I sell a Feb 28th call with a strike price of for a premium of 0.
If the stock price goes to , I have the obligation to sell it at . What if the stock price goes to ? Do I have the obligation to sell it at or does it get auto sold at even though the stock price is at ?
I understand that in both cases, I get to keep the premium received.
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The owner of your short call has the right to buy this stock at . If the stock has dropped to , it would make no sense for him to do so since he can buy it for less on the open market. The call will expire worthless and you will continue to own the stock but at a loss of .50 due to the drop from to less the .50 premium received.
What you refer to as "Auto sold" only occurs at expiration. In the US, if an option is one cent or more in-the-money (ITM) at expiration, the Option Clearing Corp (OCC) will automatically exercise options whether they are long or short. This is called Exercise by Exception. For equity options, you will end up with a long or short position in the underlying (index options are cash settled).
If you are long the option, you can designate to the OCC via your broker that it is not auto exercised at expiration. This would make sense if it is ITM by pennies and your commission and/or fees to close the position exceeds the ITM amount.
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