Trading Covered Calls to Generate Income

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2 thoughts on “Trading Covered Calls to Generate Income”

• How does IBKR handle the assignement of short leg on a PMCC when both options are ITM? Let’s take this example with XYZ (currently trading at 112$) :  – I buy a LEAP call on XYZ Aug21 2025, strike price at 105$ (price paid 2000$) -I sell a call for XYZ with feb 21 expiration 2025, strike price 120$ (premium recieved : 200$) Let’s pretend XYZ reaches Feb21 expiration ITM, at 125$ and I believe the run is over and no longer want to extend this trade by rolling How does IBKR handle the LEAP as my collateral at expiration (and the P/L) Since my capital is limited (hence the use of the PMCC)I don’t have enough margin in case of assignement on the short leg, I would expect that the platform recognize the LEAP to resolve the diagonal spread altogheter. In this case I would prefer NOT to roll but let the short leg expire (keep my premium instead of buying back short call with a loss). And then take the profit on LEAP up to 120$ (I know the shortleg has capped the profit from 120$ to 125$ but it’s fine since I want to close the trade). Since the plateform seems to recognize the LEAP when selling the shortcall (minimum margin is needed), I would assume that it would be able to “handle” the transition of the 100 shares from the LEAP to the Short leg without creating a margin call or a liquidation problem for me ?? Otherwise I fail to see the whole point of the PMCC (unless you go REALLY far Otm for your short with minimum premium and chance of assignement).

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  • Hello Nell, thank you for reaching out and we apologize for the delayed response. If your short call is assigned at expiration, your account will be short 100 shares of XYZ at $120 while still holding the long Aug 2025 call with a $105 strike. The long call is not automatically exercised by IBKR—this is standard across the industry.
    If you want to use the long call to cover the short stock, you must manually exercise it.
    If the assignment creates a margin deficit, you’ll need to take action to resolve it. Otherwise, IBKR’s automated liquidation system will close positions (not limited to XYZ) to bring your account back into margin compliance. Liquidations typically occur about 10 minutes after the market opens. We hope this helps clarify things!

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