Video Tutorial: How to Repair a Covered Call to Reduce Risk
January 27, 2016
Last update: July 2021
Watch and learn as Coach D demonstrates how to roll a covered call down and out to offset risk and bring in more premium as he repairs a protective call write that has traded below the strike price and break-even price point. Don’t miss out on this vitally important repair strategy!
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16 Replies to “Video Tutorial: How to Repair a Covered Call to Reduce Risk”
Hey thanks Noah. Yea I have to done something similar to my long term positions. Works great from a capital preservation standpoint. I purchase gpro at just under $18 and now it is $10 something yet my YTD is only down -$150. That is obviously way better than being down $-800. That was my first live collar so I’m sure in the future I can do better. Keep up the good work. It is greatly appreciated and valued.
Very helpful (and timely) Noah. Good explanation of when and why you would choose to sell ITM calls, serving triple purpose of offsetting delta, lowering BE, and bringing in premium to pay for insurance. Thanks!
I could have had a V8! I needed to learn that a few months ago . . . better late than never.
Noah, I’m confused.
I bought GPRO @19.07 and it dropped like a rock. I’ve been selling calls since then but lower strike prices. The current call sold was the Feb 16 11.
When I go to the risk graph, there is no break even point and the whole graph is way below zero.
Can you help me on this?
Great Video Coach D. Thanks.
Could you do a video showing how to manage a covered call on USO, where the short calls are now in ITM
you need to factor in your p/l year to date and then divide it by the number of shares and then subtract that from your original purchase price of the stock. (make sure to factor any current profits from your current covered call.) If you’re working from your P&L year to date it will be easier to determine your true breakeven point. It may take several weeks or even months to repair the full position. Weigh the cost and the time involved and determine if its worth the time and energy to repair.
If the calls are in the money, it’s usually best to let them call you out, otherwise you’ll buy the calls back at a loss further raising your cost base. It’s usually best to let them call you out unless you have a very strong conviction that USO is going to rise. Without the specifics on the USO position in question, I’m unable to provide more specific insight.
Gino,I’m confused. Watching the repair video you sold a call at 13. Yet the stock price is currently around 14. Doesn’t that pretty much guarantee that you will get called out? What am I missing here?
Sorry, not Gino. Coach D.
Love it. Thanks. 🙂
It is a protective call write, which is designed to protect capital using the intrinsic value of the options to offset the downside risk and the extrinsic value of the options to recoup losses. It is a defensive play for when a long stock or cash flow covered call goes bad. Rolling down and out to get more premium to offset risk. If done properly on the right kind of equities you can buy a quality covered call stock, like the candidates from the tackle 25 without exposing yourself to too much risk. It’s o.k. to get called out in this case because not only will we get all of the capital back, with the trade adjustments we’ll actually still come out winners even though the stock has dropped over 6 points which would have resulted in over a 30% drawdown on the capital used in a cash account and a 60% drawdown on capital used in a margin account. yet I’m walking away unscathed with about a 7% return if we end up getting called out.
Awesome explanation! Thanks Noah!
The video and the dialogue of questions and answers inspired by the video have been nothing short of awesome. Thank you!
Thanks Noah. I appreciate the clarification. (Going to have to read it a few more times, though. lol)
Noah, I have much to learn from the following trade. Any thoughts will be greatly appreciated:
RE: CRUS Trade Jan 5 STO Feb1 16 call 29.5 Strike, Jan 7 Trade went way OTM with rapid downward movement of stock. BTC and STO CRUS Feb1 16 ITM 26 call to reduce cost to 25.66. CRUS rose in price and kept 26 call based on Extrinsic value over 1% rule. The remaining Extrinsic value was 3%. CRUS gaps up 15+% and am now more that 15 strikes ITM. 26 call became too expensive to buy back. At net cost of 25.66, will be assigned with zero loss and zero gain(plus or minus). I called TOS to confirm position and they gave me two free trades to cut my trading cost. One question is: Are there situations when one discards the less than 1% remaining Extrinsic rule to adjust the trade earlier which would have been much more cost effective? Another: When the stock started the downward spiral, I assumed that to buy a put at that point in time would have been too expensive. How do I approach protective puts when the downward movement has already accelerated?
Thank you very much for any insights.
Very helpful, thanks so much!
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