Covered calls for income are the least risky of option trades, the biggest risk is opportunity loss if the stock moves above the strike price. If it’s not a buy & hold position it’s not a major issue. But with a buy & hold position you might have a capital loss (and tax consequences). The conundrum is that while ‘anchoring is not a good idea’ the capital loss is real.
With stocks that don’t pay dividends, getting called is highly unlikely which gives the option seller the opportunity to roll the calls roll up & out right up to expiration.
One situation I have not heard talked about is closing a covered call position early because it has already earned most of the premium. Say you sell a call 30 days out for $300, or $10 per day. If the premium drops to $100 in 10 days you have made $200 or $20 per day and the remaining value is $100 in 20 days, $5 per day. At some point you might want to close the position. I tend to put a Good 'Til Canceled (GTC) Buy to Close (BTC) order at 10% of the original premium. Maybe I should raise it to 20% right after selling the call.
The reverse situation is the stock going up above the strike price. To keep the stock you have to roll the call up, out, or up & out. They call this, “Trading like a pro.” What I have not yet seen is a tool to find the best options available in option chains with hundreds or thousands of calls and leaps. My Call Option Selector can do it but I have yet to find the best way to implement it. The solution seems to be to maximize both premium and capital gains in the least amount of time. As I discovered yesterday rolling up and out PLTR calls, the strike price does not need to be at or above the stock price, just above the current strike price which gives the stock the opportunity to drop in price and gives you the opportunity to roll the option once again later. This trade seems not to be considered, “Trading like a pro.”
Thinking by writing is better than thinking aloud. Back to programming the Selector.
The Captain
PLTR per contract
Strike $110 → $120,
Net premium $376
$1,376 in 90 days
$15.29 per day
This seems to be a good way to walk back up buy&hold positions.
Note, $$$ per day is a good way to compare trading various stocks and options. Instead of comparing Apples to Aardvarks, compare $$$ to $$$.