In my previous post on covered calls, I explained what it is. In this post, I will explain how I manage my covered calls. Just like stocks, you need to have a plan in place with options.
Why manage the option? It has an expiration date and will cancel out itself: either it expires worthless or you get assigned and you need to deliver the stock in exchange for the agreed strike price.
Looking at options like that, you are right. But there is a third way. This is a way teached by many sources out there, tasty trade being one of them. As the stock market has a random walk, you do not know what will happen next. Will there be good news tomorrow and will the stock go even higher? Or will there be something going on in China, a fraud,… that sends the stock downward? I don’t know and my crystal ball is broken.
That is why I buy back my options with approx 50pct of the original premium received. Yes, I can get more when I wait the expiration day. But I also could get assigned. And in general this is not what I want.
I sell covered calls to get extra return on my stock, and I want to repeat this process as long as possible. That is why the “manage at 50pct max profit” is ideal for me.
What if the stock goes beyond my strike price? At that time, buying back the option will cost me more than the original premium that I got. I have now 2 choices
1- do nothing
If the stock does not drop, I need to sell the stock. This is why you need to be sure you want to sell the stock at the strike price
2- roll the position
This means that you buy back the open call position and sell another one at another expiration date and potentially strike price. This is called rolling a position. More on rolling calls later on. I have some hands on experience now with covered calls that are in the money. For now, It stays a theory to roll the call. I still need to figure out why I fail at doing so.
How do you manage your covered calls?