Protecting a covered call position

Pekelo

Pekelo

What is the best way to "lock in" a CC position when the stock moved up and still lots of time left until expiry, but I expect it to drop back? Obviously closing the position is not good, because the premium moved with the stock higher.

I thought of 2 ways:

1. Buying puts for the price of the premium received. If the stock doesn't drop back, I wasted the premium but no other loss.

2. Selling the stock but buying a higher call, to convert the position into a vertical call spread, for keeping the margin low purposes (plus I don't like naked calls). This way I lock in the stock gains although there is a danger of loss if the stock keeps going up.

Any other ways?
 
Pekelo said:
What is the best way to "lock in" a CC position when the stock moved up and still lots of time left until expiry, but I expect it to drop back? Obviously closing the position is not good, because the premium moved with the stock higher.

I thought of 2 ways:

1. Buying puts for the price of the premium received. If the stock doesn't drop back, I wasted the premium but no other loss.

2. Selling the stock but buying a higher call, to convert the position into a vertical call spread, for keeping the margin low purposes (plus I don't like naked calls). This way I lock in the stock gains although there is a danger of loss if the stock keeps going up.

Any other ways?
More...

Not sure of the question, exactly, but ...
puts could help you "collar" -- I'd still look for a way to get paid.
(Like, selling puts at your original basis.)
and
If you roll an ITM call closer-in-time, you'll be paid for that roll, whereas if you roll an OTM call further-away-in-time, you'll paid there.

Random, I know. But perhaps a kit.....
 
Pekelo said:
What is the best way to "lock in" a CC position when the stock moved up and still lots of time left until expiry, but I expect it to drop back? Obviously closing the position is not good, because the premium moved with the stock higher.

I thought of 2 ways:

1. Buying puts for the price of the premium received. If the stock doesn't drop back, I wasted the premium but no other loss.

2. Selling the stock but buying a higher call, to convert the position into a vertical call spread, for keeping the margin low purposes (plus I don't like naked calls). This way I lock in the stock gains although there is a danger of loss if the stock keeps going up.

Any other ways?
More...

If you expect the stock to drop lower than the strike price of the call, then just close the entire position. The further the stock has moved past the strike of the call, the less time premium is left in the call. At some point, it becomes a real-no-brainer to just close the position and redeploy capital somewhere else unless you're trying to hold out for a dividend. Since I try not to use leverage and always have a lot more buying power than I use, I try to hold until expiration to squeeze out every last penny of premium. However, if I'm concerned about the stock on a covered call dropping below the strike on the call, then I'll close the position early to remove the risk. Sometimes if I think the stock can drop, but I'm still comfortable with holding it, I'll sell an OTM call further out in time as a hedge. Depends on the environment. In this environment, I'm closing rather than hedging.
 
What's to "protect" with a covered call?

Worried about a crash? Buy a put.

(All of that "risk protection" can get expensive, however.)
 
The best way to lock in a gain on an appreciated CC position depends on what the underlying (XYZ) does, going forward. Yeh I know, kind of a Captain Obvious statement.

What "might" be best depends on several factors. How far OTM was the short call initially? How far now? How much has XYZ appreciated? How much remains until short strike reached? How much time has elapsed since opening the position (making long puts cheaper now)? How much time remains until expiration?

Buying a protective put turns the position into a collar. There are two decisions that go into deciding the strike - the premium cost and the distance to strike (if the put is OTM). The total of those two is the potential give back if XYZ drops.

Selling XYZ and converting the short call to a bearish vertical has a premium cost and like the protective put, a potential loss, in this case on the spread (difference in strikes less the net paid/premium received). I say paid/received because if you pay more for the long call than you received for the short call by legging in, the spread loss could be more than the difference in strikes.

When I have done this, it's often after the stock has gone nicely ITM. Sometimes I have purchased more long calls, creating a ratio call spread. This loses more b/t the strikes if XYZ meanders but prior to expiration, it may offset ITM loss if XYZ rises modestly more and if XYZ powers up, more long than short strikes can turn the ratio combo into a profit. And if lightning hits and XYZ collapses, you keep all of that ITM short premium. Sweet when it happens.

Another possibility is that if the original short call was fairly OTM at the outset and if XYZ has moved up decently, you could replace the stock with a long call near the money, locking in some of the stock's appreciation.

In all cases, you need to run the numbers to see what the R/R looks like and which one you feel most comfortable with.

And sometimes, all of this is too cute by a half and the best thing to do is to avoid obsessing over squeezing out the last buck and just book the current gain and find another potential winner. The amount you give up by closing the CC is likely to be much less than the amount you give back if XYZ drops.
 
Last edited:
ET180 said:
If you expect the stock to drop lower than the strike price of the call,
More...

No, not that big of a drop, just maybe back to the strike price. But I want to take advantage of me betting in the right direction. Of course I could just ignore the fluctuations. If I close the position outright, the gain is minimal.
 
tommcginnis said:
1. (Like, selling puts at your original basis.)
and
2. If you roll an ITM call closer-in-time, you'll be paid for that roll, whereas if you roll an OTM call further-away-in-time, you'll paid there.
More...

1. I was thinking of selling at the current strike but this makes more sense, locking in some gains, because that put is going to be much cheaper than the call sold.

2. I wouldn't do that because I would lose premium on that.
 
spindr0 said:
The best way to lock in a gain on an appreciated CC position depends on what the underlying (XYZ) does, going forward. Yeh I know, kind of a Captain Obvious statement.
More...

I guess you explained all the versions and yes, it depends on one's expectations of what is going to happen.
 
You must log in or register to reply here.
Back
Top