Closing covered calls and wheres the profit?

groundhawk20

groundhawk20

When selling the call part of a cov call is it normal that it expires on its own or is it better to close it out before?

When selling should you look for the price of the option to be lower or higher than what it was put in for?
 
You could close it before expiration. You'd pay the premium price and the commission. Your profit would then be the initial premium you collected minus the "premium you paid to close"... which could leave you in a net losing position on the option play if the underlying were far enough ITM. (Really no good reason to play that game. Just let your stock be called away... keeping the premium... and re-buy it.)

KISS as always.
 
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Scataphagos said:
(Really no good reason to play that game. Just let your stock be called away... keeping the premium... and re-buy it.)
More...

There is at least one reason that someone might want to close the covered call before expiration instead of allowing it to be exercised, and then buying the stock again.

Selling the stock could have adverse tax consequences. If the intent is to hold the stock long term, selling it could trigger a taxable gain. The converse is also true. If the sale of the stock results in a loss, that loss will not be tax deductible if you buy the stock again the next day. It would be a wash sale, and the loss would be added to the basis of the new stock.

You can wait until the day of expiration to close it, and if the call is deep in the money, then it should be trading at parity, i.e, if the stock is at 50, the 45 call should be trading at $5.00 just before expiration. There should be little or no extrinsic value at that point. But if it is at or near the money, then there will always be some premium in the price.

BMK
 
BMK said:
Selling the stock could have adverse tax consequences. If the intent is to hold the stock long term, selling it could trigger a taxable gain.
More...

Tax considerations should not be an issue for any trade. The attempt to secure "long term capital gain taxation" is mostly futile and counter-productive.

IOW... if you seek LTCG, you have to just "suck it up and endure" all price fluctuations... maybe ends up being profit/tax-favorable to you, maybe not. In the realm of options... the time frame is too short for that to be a legit consideration.
 
Okay, I see your point, that if you are engaged primarily in short term trading of options, the taxes may take a back seat, or not be a real variable.

But aren't there some folks who hold stock long term, as part of an investment portfolio, and try to make extra money by selling calls against it? If they have held the stock for years, there might be a huge capital gain that they really don't want to realize... and that would be reason for closing a short call before expiration.

BMK
 
Taxes DO play a role in my covered calls this years. I wrote a ton of covered calls on losing stocks set to expire in Jan 21. My wife and I have a small farm we intended to sell in 2021. The buyers (who have wanted the property for years...Landlocked) decided they wanted the property in 2020...Close in September (big capital gains tax hit for us).

We will have to buy back our covered calls, to take large long term capital loses, to offset our long term capital gains on these losing stocks. Just saying in a rare situation, you do need to buy back your covered calls...As per our CPA.
 
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