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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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?
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).