Buy back options? Or wait until Expiration?

Question

I bought 215 shares of ANF last week @ 74.80 and sold 2 Dec 75 contracts and netted about $700 (covered call.)

The stock is now at 77.20. Didn't think it would shoot up that high.

Now do I: buy back the calls? Or wait until expiration? Right now the Dec 75's are priced at 4.80 a piece compared to about $3.40 when I sold them. I could buy them back and sell 2 Dec 80's.

What would you do? What would my new profit be?
I'm new at this so I'm eager to learn.

Answer 1

When you buy 100 shares of a stock and sell a covered call the maximum profit you can normally make by the expiration date is achieved if the stock is above the strike price at expiration. If the maximum profit possible from the trade is not what you want to achieve, it is not clear to me why you would have made the trade to begin with. So, in answer to the question "What would you do?" I would do nothing and let the stock be sold for $78.40 ($75.00 + $3.40) if it is still above $75.00 at expiration. I would not have sold the call if that was not what I wanted to do.

If you do decide you want to buy back the calls, you will usually be better off waiting until the options are close to expiration and there has been more time decay. Of course, if you do wait you lose most of the profit possbile if the stock price continues to go up. You have to decide if you think that is an acceptable risk.

You should also take into consideration any events scheduled between now and expiry that could have a major impact on the stock price.

Answer 2

Well if you unravel this trade and sell the calls you would lose $280 on the calls ($680-$960). But you would gain $516 on the sale of the shares ($16,598 - $16,082). You covered calls didnt work out so well and the trade is really over. Waiting till expiration may make matters worse since the option value will be eroded longer you hold onto them. If your original intent was that the shares would drop clearly that has not happened. Looking at the stock chart seems to reveal that this stock has come down quite a bit already. I am not sure it has room to drop further. A poor holiday retail season is already built into the stock market so I am not sure you will get hte drop you are looking for.