So far in this series on covered call writing, we've defined what the strategy actually is and discussed volatility and assignment, two big factors to keep in mind at the outset as you sell that first covered call. Today we'll be discussing Plan B: the importance of planning in advance, in the event that your stock actually goes down versus up.
Tip 3: Know in advance what you'll do if the stock goes down.
You wrote a covered call on a stock you're bullish about -- so if that stock goes down, it helps to have a plan in place.
Again, you have more choices than you think. Contrary to what many investors assume, selling a call doesn't lock you into that position until expiration. You can always buy the call back and remove your obligation to deliver stock.
If the stock has dropped since you sold the call, you may be able to buy the call back at a lower cost then the initial sale price, making a profit on the option position. The buy-back also removes your obligation to deliver stock if assigned. So, if you choose, you can then sell your long stock position, preventing further losses if the stock continues to drop.
Keep your eyes peeled for my next post, explaining the difference between "static" and "if-called" returns -- including why this distinction should matter to you. See you then!
Regards,
Brian (OG)
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options.
