Personal Finance & Money Asked on April 7, 2021
I would like to know, if it is possible or likely, that an "out the money" share buy order would be skipped, when a stock prise rises very rapidly.
Context:
I have 466 shares of tesla. I have a high conviction and plan on holding for a long time.
From time to time, I buy more, when I think the stock is grossly undervalued. Sometimes the stock drops sharply after I buy, but I don’t mind because I have a very high price target for 2025 to 2030.
I would now like to leverage this situation into income. My plan is to sell covered calls for say 50% of the shares. However, what I would absolutely hate is if the calls I sell, get executed, and I lose my shares all of a sudden.
So, I am thinking of putting in a buy order, at the strike price of the option, to prevent losing my shares. If the stock suddenly rises a lot, the options would get exercised, but at the same time, my buy order for the same number of shares would be exercised, so I would not lose out on the run-up. Of course, I run the risk of buying more shares, after which the stock sharply drops again, but as mentioned, I am OK with this.
Now my question is, if my order can somehow be skipped, while the price rises for some reason? I know that stop losses can sometimes be skipped, but does that also apply to buy orders?
And finally, does it make a difference if my out the money buy order is market or limited for this purpose?
Or perhaps there is a different tool I should use instead of what I describe here?
Also do buy orders get deleted by the system every now and again? Do I need to resubmit them periodically? I am a customer of IB and have a pro account.
If you place a limit order to buy and price gaps through your limit price, you will not get to buy additional shares.
If you place a conditional order that becomes a market order if a certain price is reached then you'll buy shares but who knows what the price might be?
For example, with TSLA at $700, you sell an $800 covered call and you place an order to buy shares at $800 if it gets there. TSLA gaps overnight and you buy 100 shares at $900. If non sheltered, you'll have to pay taxes on the capital gain due to assignment unless you can designate the latter purchase for sale but then it's a large realized loss constrained by a $3k deduction limit per year and possibly a wash sale violation if you buy replacement shares within 30 days. Maybe a nothing burger, maybe a headache to you.
What if instead, TSLA surpasses $800 and you buy another 100 shares at $800 if you're lucky but perhaps $900 if there's a gap. TSLA then drops like a rock. Your short $800 call expires, you get your modest amount of income but now you have another 100 shares at unknown purchase price which really adds to your losses.
The short answer is don't monkey with covered calls unless you're willing to sell the stock.
Plan B is take the chance of assignment and hope that there's no huge gap so that you can roll your short call up and out for a credit, giving you a chance to achieve more capital gain and keep your shares.
Plan C? Consider this possibility: Since you're bullish on TSLA, sell a deep OTM bullish put vertical. If unassigned, you'll earn some income. If assigned, you'll buy more shares at a much lower price without all of the above headaches.
EDIT: Regarding you comment asking about rolling short options:
Suppose when TSLA was $600 on 3/05 you sold the 3/19 $700 covered call for $8. Now, TSLA is $694, your short call is $24, and you're concerned about assignment.
Look for a later expiration where the strike price is higher and you can roll up and out for break even or better. Some random choices: The 4/01 $750 call is about $24 as are the 4/09 $780 call and the 4/16 $800 call.
Using the first one as an example, place a spread order to buy to close your 3/19 short $700 call and sell the 4/01 $750 call for break even. Now you have the potential for another $50 of capital gain ($80 for 4/09, $100 for 4/16).
You should roll before your short call gets in-the-money and you can continue it as long as TSLA moves up in an orderly fashion. If it gaps up well above your short strike, it becomes problematic, at least for me since I would never incur large realized losses (on the short call) in order to defend paper profits. The market has a perverse way of making you pay for that. I'm more than willing to realize gains and defend paper losses.
An example in reverse. I chat with a fellow who was short OTM $700 TSLA puts a year ago year. As TSLA dropped $400+ ($800 or so down below $400), he kept rolling down and out for credits. TSLA eventually rallied and he became profitable at a far lower price. Too risky for my taste but by selling time for intrinsic value (lower strike prices), he survived.
Correct answer by Bob Baerker on April 7, 2021
You only sell covers if
This is the exact opposite of your situation!
Again, you've literally described "when you would never, ever" sell covered calls.
So don't do that, and forget the idea.
I suggest you do what Bob.B. says in his final paragraph. I don't, like, understand it but I'd just do what he says on faith. :O
Forget about writing calls in your situation.
Answered by Fattie on April 7, 2021
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