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First of all, definitely learn more before you put on the trades. This
question is a good place to start learning, but you need to have a good
understanding of how things work before you play with covered options around
expiration or you may end up with more risk than you think you have.
These two things do not expire the same day. March options I believe expire
on 2/20. The futures trade into March with First Notice Day around 3/1.
When you place this trade, your risk reward looks like this. If the futures
stay at 122-00 or higher to expiration the most you can make is the option
premium you sold (no matter how high the futures go). If the futures go
lower, you will collect all the option premium also MINUS the loss on the
futures position. The loss on the futures position could be a whole bunch
if the market drops, so just realize that you have limited profit potential
and unlimited (virtually) loss potential. That doesn't mean it is a bad
trade, just realize it.
If the market is above 122-00 at expiration the option will be "assigned" to
you and the future will be called away so you will be left with no
position. If below 122, the option will just be worthless and you will be
left with just a futures position after 2/20/98. At this point you can sell
another option if you want to continue to collect premium.
The good news is the at the money options do have the most time premium to
collect, so if you think you can figure out a way to limit your downside,
this might be a worthwhile option selling strategy if it fits your view of
the market over the next 6 weeks.
Good Luck,
Eric
wes blake wrote:
> Hello,
>
> I was wandering if someone could explain to me what happens in this
> situation. If I buy one futures contract on March T-BOND @ 122.00 and
> sell a March call option 122.00. Can someone tell me what happens to the
> futures contract and the option. Does the option expire at the same time
> the futures contract expires, or does the option expire first.
>
> I want to sell some options on futures and I have done it and never had
> to cover it, I have sold before that point, but I'm not so sure what
> happens near the end of month with options and futures.
>
> Thanks,
>
> Wes
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