would you buy back a covered call?

Question

the charts looked like the stock was going down, so you sell a covered call. With 2 weeks left it is going back up. would you consider buying it back so you won't get called out? Or can you.

Answer 1

You can definitely buy it back. Do you want to? That depends. It will cost you something to buy it back (the current price of the option plus the commission), but that might be a good investment. If your option is exercised, that means the underlying stock is sold. Two reasons you might not want that to happen are:
1) You have a significant gain in the stock (and think it will still go up more) and don't want to pay the capital gains tax yet.
2) You think the stock is going up more so you want to keep it and it's cheaper to buy back the option than to let it be exercised (which probably involves a fee), then buy the stock back again.

On a side note, the tax rules on covered calls are pretty complex. To make life simpler at tax time, it's best to only sell covered calls that are out of the money (based on the previous day's closing price) and have more than 30 days until expiration. Anything else could affect your holding period for the stock and/or subject you to the straddle rules (which I think are not easy to understand).

Oh, one more thing. Someone said to wait until close to expiration to buy them back. That will reduce the time premium you pay, but be aware that the option can be exercised at any time when it is in the money, so if you really don't want it exercised, you are taking a risk by waiting.

Answer 2

I am adding some contribution here because the existing comments busted up my confidence. I have ARWR for a while: cost 8.64, current price: 14.30, 300 shares. I have sold 3 covered call contracts since the beginning. Since then I have been buying back my contracts, 3 times. Of course you have to pay more to buy it back, but the Idea is to sell the contracts at higher premium using spread. You get the stock appreciation while goes up and higher premium on your new contracts. One good thing is that your covered call is also insurance if the stock goes down. If you buy puts on the same underlying stock, similar strike and time, then more security, and it is called Collar.

Answer 3

Yes, you can buy back a covered call option. Should you all depends on what the price is, is it in the money and by how much and how much more you exect the stock to rise. Remember you must put up the money to buy it back, so you need to have that money in your account to do this. What I have done is buy the option back and at the same time write another at a higher strike price and at a later time. For example buy back the April 25 and write a June 30. You can do this as a spread and place it as one order. This keeps your position covered and reduces the amount you have to put up to buy the option back, because you will receive the premium for the new written call.

Answer 4

I would wait until very close to expiration so the time premium will evaporate. If you are in the money, as long as there is some time premium you probably won't get exercised until right at the end.

Answer 5

Mr. BankokBob hit the nail on the head. Good job.
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