Covered calls are simple in theory, but managing the trade can be a bit tricky. For instance, what do you do when the short call moves ITM? Do you let it ride? Do you roll it up quickly before it goes too deep ITM? In today’s video, we explore the pros and cons of each. The answer, as is nearly always the case, is “it depends.”

Enjoy!

Covered Call Management

Buy 100 shares of stock: BULLISH

Sell 1 call option: OTM, 1 month, delta -30: BEARISH

Hedged overall bullish position.

Delta Perspective:

Long 100 shares: Delta +100

Short 1 call: Delta -30

Net Delta: +70

Long stock at $35

Sell 1-month $38 call for $1 premium

Two weeks later, stock rises to $38.50. Call is now ITM and it’s worth $1.50 premium.

Trade Management

1. Call moves ITM
   1. If you’re willing to be assigned and satisfied with the max gain, then do nothing.
   1. If you’re unwilling to be assigned and want to re-open the upside profit potential then you want to roll your call up or up and out.
      1. For long-term stock positions, I don’t want to lose too much on the short call on a losing month, sooooo, buy it back when it goes ITM.
      1. Selling 20-delta or 30-delta cov calls. Rule is roll up or up and out when hit the short strike.
         1. Pro: you’ll only take small losses on the call and you’re not capping your gains that long in the stock.
         1. Con: sometimes you will roll up only to see the stock fall right back down.

One: Ride the short call to expiration EVERY TIME. Benefit – no micromanagement, no risk of rolling up only to see the stock drop back down. DRAWBACK – if the stock keeps ripping, you can lose a lot in that short call.

Long stock

$1 profit, $1 profit, $1 profit, $4 loss, $1 profit, $1 profit, $3 loss.

Short call, short call, short call, short call,

In the LONG RUN, I want to have made money on the stock (bought stock at $30, it rises to $60) AND I would like to breakeven at worst on the short calls, if not having gained on them. Short call profits ($5).

Undesirable: (bought stock at $30, rises to $60), Lose $20 on my short calls

Legal Disclaimer

Tackle Trading LLC (“Tackle Trading”) is providing this website and any related materials, including newsletters, blog posts, videos, social media postings and any other communications (collectively, the “Materials”) on an “as-is” basis. This means that although Tackle Trading strives to make the information accurate, thorough and current, neither Tackle Trading nor the author(s) of the Materials or the moderators guarantee or warrant the Materials or accept liability for any damage, loss or expense arising from the use of the Materials, whether based in tort, contract, or otherwise. Tackle Trading is providing the Materials for educational purposes only. We are not providing legal, accounting, or financial advisory services, and this is not a solicitation or recommendation to buy or sell any stocks, options, or other financial instruments or investments. Examples that address specific assets, stocks, options or other financial instrument transactions are for illustrative purposes only and are not intended to represent specific trades or transactions that we have conducted. In fact, for the purpose of illustration, we may use examples that are different from or contrary to transactions we have conducted or positions we hold. Furthermore, this website and any information or training herein are not intended as a solicitation for any future relationship, business or otherwise, between the users and the moderators. No express or implied warranties are being made with respect to these services and products. By using the Materials, each user agrees to indemnify and hold Tackle Trading harmless from all losses, expenses and costs, including reasonable attorneys’ fees, arising out of or resulting from user’s use of the Materials. In no event shall Tackle Trading or the author(s) or moderators be liable for any direct, special, consequential or incidental damages arising out of or related to the Materials. If this limitation on damages is not enforceable in some states, the total amount of Tackle Trading’s liability to the user or others shall not exceed the amount paid by the user for such Materials.

All investing and trading in the securities market involves a high degree of risk. Any decisions to place trades in the financial markets, including trading in stocks, options or other financial instruments, is a personal decision that should only be made after conducting thorough independent research, including a personal risk and financial assessment, and prior consultation with the user’s investment, legal, tax and accounting advisers, to determine whether such trading or investment is appropriate for that user.