Alan answers a question coming from Phil of Moreno Valley, CA. Phil writes… "On June 25th I purchased 200 shares of BWLD at $82.40 per share. I then sold the July 80 covered call at $4.40. Today the stock is trading at $84.50. My question is… Does it pay to close my entire position to ensure a profit with only 5 trading days remaining until expiration Friday?"
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Alan,
Great video, thanks.
According your exit strategies book, you’d buy back the option if it dropped to 10% (or less) of the ASK value during week 4 of a 4 week option.
Is there a time when you’d buy back an option that dropped to 20% of it’s (ASK) value during week 4 (of 4 weeks), with no indications that the stock was going to continue south?
Thank You,
Linda
Linda,
Based on the parameters of your question I’d say no. We have a stable stock and in week 4 of a 4-week contract we have little opportunity to generate additional time value that month. Remember that theta is eroding our option time value mercilessly in the final week of a contract. Buying back the option at 20% of the original option sale would be sacrificing profit with no apparent benefit. If option price dropped to 10% of the original value in week 3 of a 4-week contract (not week 4 of a 4-week contract) there may be an opportunity to generate a time value credit. Now, in week 4, if there was concern of a major price decline (negative news comes out) then any position can be closed at any price (I call this “converting dead money to cash profits” in my books and DVDs).
Good question.
Alan