When to Close

• Closing a Call

• Expiring Calls

• Rolling a Call

Rule 1: The rule of thumb for taking profits on the short call is to repurchase it if the percentage profit divided by the percentage of time passed is greater than 1.  

Rule 2:  If the value of your call ever loses its extrinsic value to where that extrinsic value represents less than 1% of the underlying price, then roll the option. See Intrinsic vs Extrinsic Value

My Personal Take

• Monthly Covered Calls

  • • If the premium is less than  price per share

    • e.g. Premium remaining is $20 and the price is $25/share, consider selling

• Weekly Covered Calls

  • • Consider allowing all CC's to expire worthless to take profit

    • Use Rule 1 to determine if it is really worth waiting for the remaining premium or could you make more

    • e.g. $4 or 0.04 is remaining on your premium, you see that the stock is down trending, but plan to hold your position

    • Close your CC and open a new CC  to take advantage of the premium

Rule 3:  When your share price begins to break down below your breakeven or support 

• Only applies to stocks you do not want to hold forever

• Stocks that may see a huge downturn that could possibly not recover (poor earnings, recession, delisting, being sold, corruption, or continued poor performance)

• (Take your original cost of the shares - premiums collected over time - dividends) / Total Number of Shares = Break even Price Per Share

• Simplest version - If the stock price falls below your purchase price, consider selling. Know your charting and liklihood of a stock regaining the move down versus the unknown of it continuing down forever.

Rule 4a: If you are wanting to hold on to your shares for long term growth and investing

• To avoid assignment of your shares, near the ending date or sooner, you will want to select a strike and timeframe that can allow you to collect more premiums and to hopefully expire out of the money.

• This can be difficult to spot on a bullish trending stock

• For bullish markets, consider looking for price reversals (resistance, MA Crossing down, RSI < 50) to enter your covered call positions only. This will offer a pullback and drop in price while your covered call takes full advantage of the immediate drop.

• Another possibility is selecting a strike that has < 30 delta; this depends heavily on the ATR and volatility of the stock.

Rule 4b: To take advantage of a higher delta and larger premium

• When a stock has fallen considerably or is nearing the DTE, delta is often reduced and theta (time) is the only value remaining

• Using Rule #1 or #2 we would exit our position and look to reopen a new position

Reversals on Larger Time Frame

• In some cases we may spot a reversal on a larger time frame (typically means a big move) and want to exit our position to take profit. 

Nearing DTE and Close to Strike Price

• You may often find situations where you are near DTE and price action is close to your Strike Price

• You could hold onto your position to hopefully expire worthless, but price may also reverse

  • • Close above your strike (Covered Calls) and sell your position (100 shares) 

    • Close below your strike (Cash Secured Puts) and purchase your position (100 shares)

• Rather than wait for the close of day, you can also close your position in profit instead

  • • Example: You have a Covered Call Strike of $200 for a premium of $120 expiring tomorrow

    • Price has been fluctuating around $200 all week ($194-205)

    • At one point the price drops to $194 and you are now you have gained $100 of your entire premium with just $20 remaining (theta - time)

    • At $100 you have 83.3% of the total premium with one day remaining

    • With price fluctuating back and forth, you may decide to take your profit rather than waiting to see if your CC expires worthless.

    • The question becomes what is better?

      • • Is the remaining $20 of your position worth the possibility of having to roll your call losing time value and premium opportunity?

        • Should you close your position for 83.3% and relax in knowing you do not have to wait until the next day to see what happens? 

• Closing your position allows you to also consider Rolling (Rule 4) to:

  • • Gain more premiums

    • Better strike price based on current movements