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Ask Alan – When You Close Your Covered Call Position Prior to Expiration Friday

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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Posted on August 5, 2012 by in Ask Alan

About Alan Ellman

Alan Ellman loves options trading so much he has written four top selling books on the topic of selling covered calls, one about put-selling and a sixth book about long-term investing. Alan is a national speaker for The Money Show, The Stock Traders Expo and the American Association of Individual Investors. He also writes financial columns for both US and International publications along with his own award-winning blog.. He is a retired dentist, a personal fitness trainer, successful real estate investor, but he is known mostly for his practical and successful stock option strategies.
View all posts by Alan Ellman →

2 Responses to “Ask Alan – When You Close Your Covered Call Position Prior to Expiration Friday”

  1. Linda Ellart July 10, 2015 5:58 pm
    #

    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

    • Alan July 11, 2015 5:25 am
      #

      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