Writing covered calls. If the stock goes up, what do most people do?

Question

Close out everything? Buy the call back, even at a loss? Roll it forward and hope? Roll it to a higher strike by doubling?

Thank you for your input, would anyone roll the call option to a higher strike price further out? And essentially try to stay one step ahead of the excercise of the option. I guess it would be like pyramiding. Probably a good way to get trapped.

Answer 1

When you write the covered call you are writing at a healthy premium to the strike price. As the call approached expiration date the premium approaches zero. The stock on the other hand also rises as the option price rises. Consequently it is not possible to loosed money under any circumstances. If the stock gets called, surrender it and buy it back pocketing the premium difference then write another option. As an alternative as the option approches expiration and the stock has yet to be called, you can buy it back at little to no premium and take a nice short term loss while still holding the stock which has increased in value tax free.

Answer 2

1- Covered calls are not "harmless", you can and will lose a lot of money if the stock goes down more than the time value of the option. You are also giving up your upside potential should your stock go up a lot in value

2- To better understand your risks, consider this: It always amazes me how people say that "covered calls are not risky" but then shudder when you talk to them about selling naked puts. Writing covered calls is exactly the same as selling naked puts (if you don't believe me just do a quick chart analysis). It's called synthetic stock positions, and a covered call is exactly a synthetic short put, so ask yourself this question "Would I write a naked put?" because that's exactly what you're doing (you're just doing it less efficiently by tying up much more capital than is needed for selling a put, needless to say you could invest the capital difference into T-bills or similars and have an even better return)

Anyway, usually if the stock goes beyond your strike price you have 3 choices:

1- You think the stock's price will keep on going up, at which point you might want to buy back your call to ride the upside

2- If you think the stock's price will stay flat at this level or slightly up, you can just sell a further OTM call

3- If you think the stock's price may revert back down before your call's expiration, then just wait. ITM calls and puts are almost never exercised before the last day since it would be stupid (your buyer would give up the time-value cash when he could just sell-to-close and keep both the profits and the time-value cash...would you get 100$ if you were offered 150$? Not likely)

Answer 3

Covered calls are basically harmless. The loss will happen only if the stock moves beyond the premium you received. After that any movement will be offset by your gain in the physical security you hold. If the option move deep into money your loss will be restricted to the differnce between the expiration day price and exercise price. Still you have the premium you received as profit.

Answer 4

If stocks price rises, most people who buy the stocks will celebrate.