mango

Hi all, I've been trading stocks for a couple years now but have only dabbled in some basic options trades (i.e., buying calls/puts). Anyways, I've been messing around with options more lately and recently came across a scenario in which I need some help. Let's say you write an out of the money call with an expiration 1 year away. 6 months later, the stock is right at the the exercise. I realize you could close out the position by "buying to close", but this could be potentially expensive given the remaining time premium and the fact that the underlying share price is close to the strike. What if you just bought the underlying stock at or near the exercise price (assuming you had enough money to buy the underlying stock). Then, 6 months go by and the stock has gone up and the option is exercised. The losses on the call option is then cancelled out by the appreciation of the underlying stock you just bought, though you still have the premium. Assuming you can buy/sell the underlying stock as it moves around the exercise price, seems like you can always protect yourself against a loss (not including fees). What am I missing? At best, the stock moves down and you pocket the premium. At worst, this seems like a way to generate yield (proceeds from writing the option / total cost of owning the stock). Here's an example of how I'm thinking about this. Netflix Jan 2015 $450 call is selling for about $20. You sell 1 contract. If stock moves to $450 in 3 months, you buy 100 shares of nflx stock for $45,000. Jan 2015 comes around and nflx is at $500. At exercise, you have to sell 100 nflx shares at $450, so you receive $45k and then hand over your shares (which you bought for $45k). This would imply 4.4% yield (8.8% annualized, before fees). This can't be a way to get some pretty good yield risk free, can it? Seems like I'm missing something very obvious.