How to protect a CC in the money position?

Pekelo

Pekelo

So let's say I establish a covered call position in a highly volatile stock, and I don't mind the stock to be called away, I just want that sweet premium. The question is, what to do if after establishing the position the stock moves up, and I would like to lock in the gains or at least most of it in the cheapest/most effective way.

For the sake of the example, let's say GME.

Let's assume I bought 100 GME stock at $120 and sold calls at 120 for 25 bucks 9 days out. Then just after I did this the stock goes up to 180-200. I am happy with this scenario, but I don't want to let the stock fall back and I want to protect the paper gains.

What is the cheapest/most effective way to do it?
 
Exactly, your short call should be trading at near 100% intrinsic value (which is $80 if GME was at $200). You just simply cover the call & sell the stock at the same time to lock in those gains (Which would essentially boil down to the $25 of the short call).
 
narafa said:
Exactly, your short call should be trading at near 100% intrinsic value (which is $80 if GME was at $200). You just simply cover the call & sell the stock at the same time to lock in those gains (Which would essentially boil down to the $25 of the short call).
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Correct. I guess my example was a bit waaay in the money. So what if the stock went up only 20 bucks? Then there should be still a decent amount of extrinsic value left, what I wouldn't want to give right up.

Looking at GME an ATM call that was $25, is $34 when the stock goes up 20 bucks. So I would give up 20+25-34=11 bucks if I just buy back the calls and sell the stock. That is like 44% of the profits. Is there a way not to give up that much?
 
FSU said:
You would simply take off the position. Sell the stock and buy the calls back. You would want to do this as a spread.
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Right. In my example I went in the money a bit too much. What if the stock goes up just moderately and there is still decent extrinsic value left?
 
Pekelo said:
So let's say I establish a covered call position in a highly volatile stock, and I don't mind the stock to be called away, I just want that sweet premium. The question is, what to do if after establishing the position the stock moves up, and I would like to lock in the gains or at least most of it in the cheapest/most effective way.

For the sake of the example, let's say GME.

Let's assume I bought 100 GME stock at $120 and sold calls at 120 for 25 bucks 9 days out. Then just after I did this the stock goes up to 180-200. I am happy with this scenario, but I don't want to let the stock fall back and I want to protect the paper gains.

What is the cheapest/most effective way to do it?
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The cheapest/most effective way here is just to let the stock to be called away and make nothing on the stock but earn the pure premium. You are not going to be able to lock in the paper gain on the stock without suffering losses on the call especially when the call was an ATM one at the time of the purchase.

Well this is the thing with CC, you can't have it both ways IF you want to have your calls remain covered. Between the premiums on the call and the gains on the underlying, you can only have one. You either earn the premium on the call but risk suffering losses on the underlying or in a better scenario, have the underlying called away at below-market prices or you get the gain on the stock forgoing the premiums on the call. In this case, since the call was already ATM when you bought it, so when it becomes ITM, you are going to have losses when buying back the calls because it's still 9 DTE so there is not much theta yet so chances are you are going to have to pay more than the intrinsic value to buy the call back after selling the stock to lock in the gain. If you don't buy back the call then the call is going to be uncovered once you sell the stock.

This is why ppl usually sell OTM calls so that way when the stock is called away you get a bit of gain on the stock as well on top of the premiums. Especially on an extremely volatile stock like GME, the premiums on even OTM calls should be really good.
 
JSOP said:
This is why ppl usually sell OTM calls so that way when the stock is called away you get a bit of gain on the stock as well on top of the premiums. Especially on an extremely volatile stock like GME, the premiums on even OTM calls should be really good.
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I agree with all you said. What I have been doing is selling ATM or slightly OTM covered calls and then trying to get my avg price down. Once my avg sufficiently away, I would just stay naked ( but not with GME lol)
 
That's like saying "I bought x at 100 and now it's at 150 but my target is 200, how can I protect that 50 I made but still retain all the upside potential".

That does not exist. You have to make a judgment call. Smart traders don't look back, they assess right now what you have and behave as if they just put on the position. Do you see more upside potential? Then keep the position on or partially on. Don't forget, you sold premium, you will earn the intrinsic value unless a dummy exercises the option prior to expiration and while it still has intrinsic value remaining. There are many variables at play here, for example upcoming dividends (may not apply to your stocks) where the call buyer may exercise early to collect the dividend. It's hard to give any answer without knowing your transition probabilities, meaning, all the probabilities you attach to moving from the current to many other future states.

Pekelo said:
Correct. I guess my example was a bit waaay in the money. So what if the stock went up only 20 bucks? Then there should be still a decent amount of extrinsic value left, what I wouldn't want to give right up.

Looking at GME an ATM call that was $25, is $34 when the stock goes up 20 bucks. So I would give up 20+25-34=11 bucks if I just buy back the calls and sell the stock. That is like 44% of the profits. Is there a way not to give up that much?
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