I have been messing around with options for some time now, but one thing tends to confuse me…when should I close/roll an option to avoid being assigned?
Let’s say I have a nice ‘safe’ stock like SHOP. It’s pretty steady in price and I’ve been able to get a few covered calls and even puts on it over the last couple years.
I currently have a SHOP 09/20/2024 71.00 Call and the share price is at >$74. So, if I do get assigned, I would miss out on more than $2 a share. If I roll it out and higher, then I would be paying for that, and it would still be super close to in the money.
Is there any cost equation that people use to determine if they should roll/close vs letting shares get called away? What is the best use of the money here…?
(ps - yes, I have been using options in my investing for over ten years. I understand all the pitfalls and I only do options on stocks I like but could let go. In this case, I would probably spin the money into puts, but I am still wondering if there is a standard process in situations like this.)
(pps - I do not mess with margin, so all my calls are covered and all my puts use actual money.)
(ppps - I am a very basic options investor, I do not do bulls, eagles, frogs, spreads, covers, duvets or any of the more multi-legged actions.)
As long as those options are in a tax deferred account, I just let them be assigned. It is not uncommon for the same stock to be available later at a lower price if I really want it - and if your stock has been simply going sideways for awhile, you might find it cheaper in the near future.
I absolutely would not roll the option to try and avoid missing out on that $2 gain. I assume you are banking far more than that on the exercising of the option.
I purchased Tesla early this year and sold 60 day options netting me about a 1.5% premium at a strike price that would net me a 30% gain. I thought that a pretty good deal for 60 days. The options were exercised at roughly a 45% gain. Logically, I could not care less that I missed out on that extra 15%. I still banked nearly 32% in 60 days. And, the stock is cheaper today if I wanted to rebuy it. Rolling that would have cost me a fortune and I would likely be sitting on a loss today.
That is the glory of a good covered call strategy. You are guaranteed to make money (or at least lose a lot less than using no options at all).
On Friday, near market close, the call option will have a few cents of time value (irrelevant) and the intrinsic value will be the market price less the strike price. Rolling forward or getting assigned are worth the same. You have not lost money, it’s only an opportunity loss.
The way I deal with this is trying to figure the optimal strike price which is pretty much guess work. As for timing, I buy back only when the option is worth a few cents. Over trading tends to be bad news.
For Selling calls, I go short time, normally in the week, rarely longer.
I ALWAYS avoid:
Earnings releases.
Big trade shows that they might participate in.
Anything Fed related like today.
Ex-dividend dates.
For pricing, I go with higher strikes. Yes, less premium but I do this for “play” not income. Our portfolio already pays much more dividend/interest than we need for our living expenses.
I very rarely write a call on an entire position. Most time I limit the coverage to 10% or 20% of the position.
I have had shares called away and a few times I lost a little upside.
But:
In most of those cases, I repurchased the stock below my strike price within a month. Some were lower by 10%.
In general, don’t write calls against securities that you are not willing to sell at the strike price.
Well, you really can’t. On Monday I was assigned on some OXY 57.5 puts (expiring Friday) that still had some time value in them. I don’t know why someone exercised them, and threw away that time value, but they did. And a few months ago, the same thing happened with some DIS puts, someone decided to throw away ~50 cents of time value and I happened to be assigned.
I’d argue that spreads are more appropriate for a novice option investor than plain single options are. That’s because using spreads, you can select ANY risk level and thus ANY potential reward level you choose. For example, if you look at BCS (Bull Call Spreads) on let’s say Disney for Jan '25, you can select a conservative 70-80 spread for a max return of 5-10%, or you could select a 90-100 risky spread for a potential 100% max return. Or you can select any combination of risk and potential return.