If I understand the question correctly, you are questioning what happens when a stock's price trade up to the strike price of the short call. To understand what happens, you need to understand the nature of a call option.
A call option provides the buyer with the right but not the obligation to purchase stock at the option's strike price. It is the option seller that has the obligation. The seller of the option is obligated to deliver stock at the strike price.
Most "stock" options are American style, meaning that they may be exercised prior to expiration. That means that the option buyer may choose to exercise their option early, before expiration, and take delivery of the stock. They are not required to exercise early. It's simply a right they have, but if they choose to exercise early the option seller will be obligated to deliver the stock.
If you have followed me this far, you should now begin to realize that there is no magic transformation that takes place when a stock trades up to the next strike price level. Those call options with a strike price lower than the current market price of the stock are simply "in the money." Option buyers typically do not exercise options early, even when they are in-the-money because they often carry some amount of "time value" in addition to the amount by which they are in-the-money.
If exercised early, any time value that an option may have will be lost. For this reason it is often better for the option buyer to simply sell their call option which allows them to capture the remaining time value. If they want to own the stock, they can always buy the stock at current market prices and sell the call option to offset the cost of the stock purchase by not just the amount their option is in-the-money, but by the amount of any remaining time value.
Should a call option reach its expiration date while it is in-the-money most brokers will automatically exercise the option, unless instructed otherwise by the owner of the option.
Now, back to our covered call trader...
Once the price of their stock climbs above the strike price of their call option they may begin questioning whether they wish to sell the stock at the short call's strike price or whether they would prefer to keep the stock. The good news for them is that if the call option has any significant time value it is unlikely that they will be assigned early. This gives them them the opportunity to adjust their covered call position should they wish to hold onto their stock. Of course, if they do nothing and the option is in-the-money as of the expiration date they can expect that come the following Monday the stock will have been sold off at the strike price and they will have realized a maximum profit on the trade.
Christopher Smith
TheOptionClub.
--- In OptionClub@yahoogro
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> When a covered call hits its "strike price", is it automaticaly sold or does the buyer have the option to wait until later or even just before the option expires to buy it?
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