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How to Manage Covered Call || Webinar on Adjustments
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A covered call consists of selling a call against shares of long stock. Typically, covered calls are sold out-of-the-money above the current price of the underlying asset. Calls that are sold closer to the stock price will result in more credit received but have a higher probability of being in-the-money at expiration.
Covered calls do not eliminate downside risk if the asset drops in price, but every covered call sold adds credit to the account, thereby reducing the overall cost of holding the long stock position.
Selling a covered call limits the profit potential and does not eliminate the downside risk. However, it does help to reduce the risk by the price of the premium received.
Adjusting a Covered Call
There are multiple ways to adjust the position of a covered call if the underlying asset’s price moves up or down before expiration. A covered call is either in-the-money or out-of-the-money at expiration, and adjustments can be made to address each scenario.
If the stock is above the short call strike price at expiration, a decision will need to be made. If no action is taken, the short call will be exercised and the broker will automatically sell the shares of stock per options contract at the option’s strike price. The stockholder will participate in the gains of the move up in the underlying stock, and keep the credit from selling the short call. Any move above the strike price will not be included. If the covered call writer does not wish to exercise, the call option can be rolled out to the next expiration month.
If the underlying price has moved sideways or down before expiration and the stock price stayed below the short call, the original covered call will expire worthless. At this point, a new position may be opened for a future expiration date at the same strike price or a lower strike price. Any credit received from selling the call option will remain. The closer to the money the new call option is sold, the greater the credit received, but the more likely the long stock position may become in-the-money and subject to assignment at expiration
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Disclaimer: This video is purely for education & information purpose only not recommendation for any stock.