Cut Down Option Risk With Covered Calls
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This is the in-the-money covered call, where we sell call options whose strike prices are lower than the present price of a stock that we own or buy for the purpose. We fully expect to have the stock taken away from us in this strategy, and if that happens we make a pretty nice profit, which is equal when to buy back a covered call option the time value in the call options.
If the stock drops and does not get taken away from us, then we will still have reduced our net cost of that stock considerably. Not a recommendation, just saying. It is at levels not seen since the shocks of the summers of and With this outlook, we could buy shares of USO today at Here are our possible outcomes:.
In that case, the stock is not called away from us. In an in-the-money covered call, this time value is always our maximum profit. In summary, our in-the-money covered call position allows us to take in a substantial amount of cash now for overpriced calls. It has a high probability of being assigned, in which case we make a known amount of money if held until expiration. If the stock moves our way in a substantial way before expiration, there is a possibility of making almost all of that money in a shorter period of time, and even if the call is not assigned it will reduce the net cost of our stock position very substantially.
For many people, this is a very attractive strategy. For comments or questions on this article, contact us at help tradingacademy. Disclaimer This newsletter is written for educational purposes only. By no when to buy back a covered call option do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever.
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