Quote:
Originally Posted by NorCalAthlete
I mean, it's called a "contract" for a reason...
Jason sold "covered calls" not "naked calls". As in, he put up his shares as collateral. If he had sold naked calls, and they expired out of the money, then ok he could just pocket the money I think. But if he sold naked options and they were ITM at expiration, and the buyer wanted to exercise, Jason would be forced to buy whatever shares he could, at whatever market price was, in order to have the inventory to cover. This would likely mean purchasing the shares at a higher price than the strike price of the contract he sold, meaning he would take an immediate loss by buying the shares and giving them to the contract holder at the lower strike price. So let's say share was $10, goes to $15, and Jason had sold a naked contract with a $12 strike. He now has to go on the open market, buy 100 shares at $15 / share, and then immediate give them to the guy holding the $12 contract. Jason may have sold the naked contract for a quick $15 gain, but now eats a -$1,500 loss due to having to buy the shares to fulfill the contract.
Selling naked options gets you into a lot of trouble if it goes sideways - read the above links on GME, VW, etc to see how it can get even the big hedge funds into trouble.
If Jason tried to sell his shares (assuming he wasn't locked out of doing so by his brokerage for some reason) he'd be opening himself up to lawsuits, SEC investigation, etc.
It's like buying a house - once buyer & seller agree on price and sign the contract, the money & title go into escrow right? So if the seller then tries to sell the house again to another person, while in contract with the first buyer, that ain't gonna fly.
Least, that's the way I understand it. I'm sure we have some more savvy financial gurus in here lurking who can correct me on this if I'm off.
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Yes, I'm basically asking what protection do you have that the person you have a contract with doesn't tell you to eat a bag of dicks because he's just going to declare bankruptcy.
Not sure in the States, but in Canada, we have insurance through the government to cover up to $100K if we have that much in a bank account and the bank goes bust. Is there anything insurance wise (or any other means, not necessarily insurance) that allows you to be comfortable that the other party comes through without going the lawsuit route?
Because suing someone takes a lot of your own money, and if he/she doesn't have any significant assets anyways, its just a waste of your money since you get nothing at the end of the day. Contracts are only good if the other party has enough assets to cover what they say they are covering.
Also, can you as a buyer tell whether you are buying a covered vs naked call? Options have always really interested me, but I admit I'm too dumb at the moment to really understand them, so I appreciate the education you are giving me!