In addition to jmh’s explanation, see covered call. Also, normally when you do a “buy-write” transaction (see above article), you’re taking the risk that the stock falls by more than the premium of the call option, but in this case, if that were to happen, I can recover any losses by holding the stock until redemption. And to clarify, because I sold call options that expired in November without being exercised, I’m still able to capture any subsequent gains.
Just curious but where are you trading/investing? USA or elsewhere? I’m wondering about the type of options—are they USA or European execution rights?
And, yes, I should have been clear on the potential downside of limiting gain to “during the life of the option”
Sounds like he sold call options—the obligation to deliver some set number of shares at a set price to the person buying the call option—against the shares he bought. Since he got paid for selling the call options those funds can be linked to the purchase price (and I believe under current US tax law will be linked if the call options are exercised by the person owning those rights) effectively reducing the original cost of buying the assets shares.
If the per share earned on the call options sold is greater than the NAV premium paid for the underlying asset shares, then you effectively bought the shared below NAV.
The down side is that it locks in the potential gains of owning the underlying asset shares—someone else has basically bought the right to all the gains above the strike price of the options.
How does that work and what’s the downside of that trade?
In addition to jmh’s explanation, see covered call. Also, normally when you do a “buy-write” transaction (see above article), you’re taking the risk that the stock falls by more than the premium of the call option, but in this case, if that were to happen, I can recover any losses by holding the stock until redemption. And to clarify, because I sold call options that expired in November without being exercised, I’m still able to capture any subsequent gains.
Just curious but where are you trading/investing? USA or elsewhere? I’m wondering about the type of options—are they USA or European execution rights?
And, yes, I should have been clear on the potential downside of limiting gain to “during the life of the option”
Sounds like he sold call options—the obligation to deliver some set number of shares at a set price to the person buying the call option—against the shares he bought. Since he got paid for selling the call options those funds can be linked to the purchase price (and I believe under current US tax law will be linked if the call options are exercised by the person owning those rights) effectively reducing the original cost of buying the assets shares.
If the per share earned on the call options sold is greater than the NAV premium paid for the underlying asset shares, then you effectively bought the shared below NAV.
The down side is that it locks in the potential gains of owning the underlying asset shares—someone else has basically bought the right to all the gains above the strike price of the options.