Tales of a Technician: When Covered Calls Move In-The-Money
January 22, 2019
Last update: August 2021
Traders have all sorts of rules and guidelines for managing covered calls that move in-the-money. But, in the end, the route you choose comes down to your system’s objective. Today I want to compare the methodology on a conventional covered call to that of the Bear Tamer.
Credit for today’s topic selection goes to Mr. Market which just jammed one of the nastiest V-shaped reversals down our collective throats. The wicked whipsaw has no doubt caught many a covered call trader unaware. Because of how swiftly the market moved from oversold to overbought, I suspect many of us have seen the short call portion of our positions move in-the-money.
So, what now?
Conventional Covered Calls
Let’s define a conventional covered call as one where you’re systematically selling 0.40 delta calls to milk the high amount of extrinsic value sitting near the at-the-money strike. This is the approach adopted by the Tackle 25 system. Further, we’ll assume we don’t want to be assigned.
Suppose due to this month’s huge rally, your once slightly out-of-the-money call has become a deep-in-the-money call. The rule we might use is to roll the call once the extrinsic value dwindles toward 10 or 20 cents. Essentially we would buy to close the current short call while selling to open a new 0.40 delta call. This allows us to keep the extrinsic value gravy train moving.
It should be noted that by waiting for the extrinsic value to fall towards zero, you won’t be rolling the call until it moves pretty far in-the-money. In delta terms you probably aren’t making the adjustment until your 0.40 delta call moves toward 0.85 or higher.
The Bear Tamer
One of the primary differences between a conventional covered call and the Bear Tamer system outlined in our expertly crafted Bear Market Survival Guide is the purpose of selling calls. With the former, the objective is to capitalize on time decay by selling close-to-the-money calls. Additionally, because 0.40 delta calls possess substantial premium, they provide a modest amount of downside protection on a monthly basis. With the latter, we don’t rely on the call premium for protection. Instead, we own long-term put options. The role of the calls is to simply pay for the puts, thus providing us with free insurance.
For example, if you bought a one-year put for $6, then your per-month cost is 50 cents ($6 / 12). In selling calls we would target receiving about 50 cents a month.
A second important objective is not capping our profit potential on the stock too quickly. Remember, our long put continues to lose as the stock rises. Because of this, we sell closer to 0.10 deltas for the Bear Tamer. Even with selling this far out-of-the-money, there will still be months (about 1 out of 10) where the calls move in-the-money. What do we do then?
IWM Case Study
Back when IWM was around $130, I rolled the virtually worthless Jan calls to the Feb $145 line. And, we promptly ripped to $145. So, late last week I’m sitting on a now in-the-money call with 30 days remaining to expiration. That’s a long time to sit out further profit potential in the stock! Particularly given that my protective put is worth a lot of money and has plenty to lose on further price appreciation.
So, even though there was still a boat load of extrinsic value, I rolled the call up to the $149 strike thereby opening up another $4 of potential appreciation in the stock price.
Here’s the key point. Had this been a traditional covered call, I likely would not have rolled. Instead, I would have remained in the $145 strike to capture additional time decay.
Tackle Trading Resources on Covered Calls
Continue learning about this powerful options trading strategy: the Covered Call. Tackle Trading has all the resources you need to MASTER this strategy like a PRO.
Covered Call For Beginners [Free Articles]
Learn How to Repair a Covered Call Gone Bad!
Join Coach D for an in depth look at a dynamic Covered Call repair strategy on $GMCR.
Options 101: How to set Basic Stops on Naked Puts and Covered Calls
In this video tutorial, Coach T walks the team through how to set a basic stop on a covered call or naked put position.
Options 101: How to find the perfect Covered Call Candidate
In this video tutorial, Coach T from Tackle Trading walks through a research session for covered calls.
How to use the Theta Research Tool to find the best stocks for Cash Flow
In this video tutorial, Coach Matt goes through the latest edition of the Options Research Spreadsheet explaining how to use it to find the best stocks to cash flow.
Options 101: How to Add a Protective Put to A Covered Call
In this video, Tackle Trading’s Coach Tim explains when, how, and why a trader would buy a put option on a covered call position.
Tackle 25 List: The Best Stocks for Covered Calls (2016 Edition)
The Tackle 25 2016 Edition is up and better than ever. This list contains the best stocks to cash flow and compound your gains.
Tales of a Technician: The USO Covered Call Nerve Strike
I seem to have struck a nerve with my call for a reverse split in USO. And that’s a good thing.
Video Tutorial: How to Repair a Covered Call to Reduce Risk
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.
Tales of a Technician: Theta and Covered Call Management
Just when I think I’ve exhausted my inventory of covered call insights I stumble upon yet another blog worthy concept. Today I’ll shine a light on how to identify the remaining profit in your trade, an essential skill for covered call management.
Tales of a Technician: Covered Calls: Weekly vs. Monthly
With the advent of weeklys options the choices facing option traders has multiplied ten-fold. But it shouldn’t be overwhelming.
How to Pick a Good Covered Call
In this article we will breakdown the philosophy, construction, and management of the Covered Call cash flow strategy.
Tales of a Technician: Your Covered Call Questions … Answered!
Listen up you covered call lovers. Today I’m tackling some common questions on how to get the most out of your beloved buy-writes.
Trade Journal Series: How to use the Theta Research to find Covered Call candidates
In this video tutorial, Coach Tim Justice teaches how to find the best candidates to trade the Covered Call options strategy using the Theta Research tool.
Tales of a Technician: Covered Call Alternatives for IRAs
How to leverage an IRA account by selling covered calls on long-term call options (aka LEAPS) instead of stock? Read on.
Tackle 25 List: The Best Stocks for Covered Calls (2017 Edition)
The Tackle 25 2017 Edition is up and better than ever. This list contains the best stocks to cash flow and compound your gains.
Options Theory: Collaring Earnings
Earnings season is upon us. Whether it’s a straight stock position, you’re holding for the long run, or one that you’re selling covered calls on there is a straightforward way to limit your risk.It’s called a collar.
Options Theory: What a Covered Call Trader REALLY Wants
I think I could write about covered calls and naked puts every single week and still have plenty to say at the end of the year.
Options Theory: Picking the Right Stock for Covered Calls
I received an email the other day from a trader that bought a few stocks and has been selling covered calls against them. He had questions. I have answers. Here we go.
Options Theory: Combating Volatility with Covered Calls
Nothing like a monster “V” shaped reversal to get the juices flowing, am I right? Count me among those suffering whiplash over the market’s death-defying whoops and whirls of late. Yesterday was particularly annoying for those short delta toting traders like me.
Tackle Today: Do you trade Covered Calls?
Last update: August 2021 ≈ Cash Flow and Growth ≈ I put a poll question in the clubhouse recently asking the Tackle Trading community a simple question: Do you trade Covered Calls? If you haven’t answered the question yet, you still can HERE. Of the 5 potential answers, the breakdown was interesting. 38% said YES
Tales of a Technician: When Covered Calls Move In-The-Money
Traders have all sorts of rules and guidelines for managing covered calls that move in-the-money.
Tackle Today: Meet the Covered Call
The Covered Call strategy is an old friend of Tackle Trading. This strategy is so cool that we can talk about it every single day and still come up with new ideas.
Tackle Today: Covered Calls for Cash Flow
One of the most popular techniques in the equity and options market is the Covered Call. A Covered Call involves the purchase of at least 100 shares of stock and then the sale of 1 call option against that stock.
Options Theory: Tips for Buying Puts with Covered Calls
Let’s talk about proper strike price selection for covered calls and protective puts.
Portfolio Protection For Beginners [Free Articles]
Long Put: IWM or RUT
In this video tutorial, Coach Matt walks thru how he has been handling the additional macro risk in the market by trading Long Put options on the IWM.
How to add Insurance to your Portfolio
In this video tutorial, Coach Matt takes a look at different ways to protect your portfolio accounts when the market goes south.
Protecting Your Money: Create your own Personal Gold Standard
Everyone invests. Everyone has money. Currency is a form of investment since the gold standard was removed from the currency system.
How to Protect Your Retirement
Coach Matt from Tackle Trading looks at how passive and active investors can insure their retirements against another potential market crash like in the sub-prime crisis of 2008-09.
Tales of a Technician: Tagging the Golden Goose: A Lesson in Portfolio Protection
You’re a goose chaser. Admit it. It’s the gold you seek. And that’s okay. You’re in good company. Most of us round these parts have been searching for the big bird for ages. Some have even tagged one.
Tales of a Technician: A Trick for Financing Portfolio Protection
Come lear a Trick for Financing Portfolio Protection.
I Bought Portfolio Protection…Now What?
Today is the day we layout a game plan for exactly how to manage portfolio protection.
Options Theory: Hedging Basic Series Part 1 – What is Hedging?
What is hedging? Come learn the basics in this 3-part series.
Options Theory: Hedging Basic Series Part 2 – Why do Traders Hedge?
In part one of our new series on hedging, we defined precisely what the concept means. Today we’re turning to the why.
Options Theory: Hedging Basic Series Part 3 – When to Place Your Hedge
With a sound foundation on the what and why of hedging, we’re now ready to dissect the devil. Namely, when do I place my hedge?
Options Theory: Hedging Basic Series Part 4 – How to Hedge a Naked Put
The way that you go about hedging varies depending on what your strategy is. Come learn how to hedge a naughty naked put.
Options Theory: The Protective Put
The options realm is an insurance marketplace where stock owners can acquire protection against loss in their beloved equities.
Options Theory: VIX Spikes and Portfolio Protection
Today I want to talk a bit about the impact VIX spikes have on the cost of portfolio protection.
Tales of a Technician: Managing Protective Puts in a Crash
It’s nailing the management of Protective Puts that separates the men from the boys. Allow me to offer up a few ideas.
Tales of a Technician: How to Trade in a Bear Market
The bears are roaming. And while their sudden emergence likely spelled losses for traders far and wide, the pain doesn’t have to persist. I look at this as a “fool me once, shame on you; fool me twice, shame on me” situation.
Options Theory: This is What Capitulation Looks Like
Contrarians in a bear market seek signs of capitulation. Specifically, evidence that bulls are throwing in the towel and abandoning their once beloved positions.
Tales of a Technician: Of Legacies and Long-term Investing
Herein we explore the perks of lengthening your time horizon and embracing Long-term Investing.
Options Theory: Protective Put Management
You have questions on how to protect a portfolio. I have some answers. You’ll find them here.
Trading Journals
Good traders keep excellent records. Quality trading journals are essential to your progress and growth as a trader and keeping good records will help you learn more from both your income and expense trades.
Learn more about HOW the Tackle Trading Journals can help you become a professional trader.
Reports [Premium Content]
The Weekly Premium Reports are a part of the PRO subscription.
Tackle Trading Playbook [FREE for PRO Members]
PRO Members now have unfettered access to the Tackle Coaches’ personal playbook containing thirty-one powerful trading strategies categorized according to the Options Greeks. Bullish, bearish, or neutral market conditions, this Playbook will help you dial up the right call more often and with greater confidence.
Financial freedom is a journey
Sign up now and gain unfettered access to all of the quality content and powerful Scouting Reports that our Pro Members enjoy for 15-days absolutely free with no strings attached and let us show you what your trading has been missing.
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.
