Options Trading Tutorial

I wrote an OTM covered call and the spot rose to the strike price. How can I preserve the stock gain?

I wrote an OTM covered call and the stock price rose to the strike price. The option has not yet been executed and I am wondering what a good method would be to preserve the gain in case the stock price drops again? The option now has quite a bit of time value so closing that position will eat away at half of the stock gains. Is the best choice to just wait and hope the stock price doesn't fall?

Public Comments

1. You should be willing to part with the stock before you write a covered call. Most call buyers don't want your stock, they just want to benefit from quick upward price movements with minimal investment. So they are more likely to sell the call before expiration if they can. Stock prices constantly go up and down, so about the time it seems to be running away from you and you are tempted to buy it back, the stock will retrace and take a rest. I thought I was going to lose the stock for a couple of covered calls in May when the stock price jumped up. But even though it pulled back to just over the strike, I was surprised that I did not lose the stock. Since then I should have sold ITM calls when it jumped up again, because it has pulled back again.
2. You have discovered one of the dilemmas of call writing. Nothing really does what you want without costing you money. You could buy a put to protect the downside but likely the cost will negate most of your gain. Should your call get fairly deep in the money (due to rising stock) the premium may become minimal and then you could consider rolling up to a higher strike and out to a later expiration so you can again profit from a shrinking call premium. Option strategies are full of trade offs. First you need to have an opinion on the stock and where you think it should be priced, then you devise your option strategy to fit. Calls are both fun and frustrating some times. Good luck.
3. I would think that you would hope that the stock price does fall before expiration. That way you get to keep the stock, keep the premium, and write another call. The best of all three worlds. Of course you can indeed buy back your call and pocket the 1/2 you made in the premium and also sell your stock and pocket the gain you made on the stock. That is an option.