Question

My question is about the appropriate exit strategy at expiration of a covered call I’ve written. When is it advisable to let an option get exercised; to roll straight out by purchasing the option at the same strike and selling another call farther out in time; or roll up and out. A few months ago, I sold an option on April 120 covered call. The premium at the time was about $7.50/share. I let the option become exercised at about $160, I think. Since it was so deep in the money, I decided not to roll up and out. But why would it have been a bad idea just to roll the option out to a later date, say July and thereby pocket another another premium? I don’t recall exactly what were the option premiums for the April 120s and the July 120s, but there was a profit to be made.

Answer

When I do a covered call (buy-write) my opinion determines the strike price and the expiration month. For instance, if I believe the stock is going to run up, I will sell an out-of-the-money option to give it room for appreciation. If I feel the stock might grind higher, I will sell an option closer to the money to give myself more protection. In either case, I try to put myself in a position where I will be happy if I get assigned.

If you really like the stock and you think it is going to rocket, don’t do a covered call – just buy call options.

I don’t like to buy in my covered calls for the same reason I don’t double down in Black Jack when I have two Jack’s showing. Why split a winning hand? Let the stock get called away and reevaluate. If the stock still looks strong, consider another covered call.

The only exception might be a very strong stock in a market that has just staged a major breakout above resistance. If I feel like the probability of the stock and the market moving up is very high, I might consider buying in the short call and waiting to sell a higher strike once the move stalls. I need to see a trend in both the stock and the market. Again, this might only play out 2-3% of the time.

In your case, the option was so far ITM that you could not have rolled the position to anything OTM for even money. If you did the roll for anything less than even-money, you would risk having a losing trade if the stock pulled back. You had a great trade, be happy with it and don’t second guess yourself. Start looking for the next winner.

Getting assigned on a covered call is a great thing. The stock did just what you expected and you made money. Try not to mess with it.

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