The basic covered call trader will write a call and wait until it expires then decide what action to take next. I suggest that you monitor your position and determine what changes to make before expiration to enhance your profit or decrease your downside risk.
For the call writer with less time who does not have the time to monitor the position, you have 2 options to negotiate the market action:
- Determine the price you want to close the position and then set an automatic stop order. For example, you entered a covered call and you do not want to let the stock decline so you enter a stop order to but the sold option at market and then sell the stock with both events triggered by your predetermined stock price.
- Let the option go until expiration and then make your next move. This strategy does not mean you will lose money but you will keep selling calls to minimize any stock price decreases over time.
Now, for the more active covered call trader, here are 2 actions to increase your trading profits:
- If the price of any option you sold declines to a small amount, then buy the option back to lock in profits on the option. If the option price drops to 25 cents per share or less, then you can buy it back with the different between sold option price being a profit.
- The second option is to watch the time value of an in-the-money option and buy it back when the time value gets low. the rationale is that you have made most of the profit already as time value can only go to zero. If there is only 10 or 20 cents left, you can buy to close and sell another option for more premium income.
There is no right or wrong strategy based on these two methods to trade covered calls. You should decide if you fall into the first scenario (less monitoring) or the second (more activity) based on your time commitment to your covered call trades. In a later post, I will discuss my way of trading covered calls based on a strategy that takes option obligation and stock price into consideration.
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