I sell a covered call, the stock goes down what would the reason be to buy these calls back a much lower price
buying back calls that were sold
Answers
1786 points
ChaosNantuko answered one year ago …
If there is still time left, the stock could go up again, and the covered call could still end up expiring in the money. If that happens, closing the option early would have been more profitable.
Alternatively, you could buy back the original covered call, and sell a covered call that is now at the money, or just out of the money.
If you believe the stock will continue to go down, then it would be a good idea to sell the call so you can safely sell the stock.
In the end, what is the point of not closing the option? If the stock has went down significantly, then the option has likely had almost all its gains already, so why risk holding it longer when you can close it, and get your options back (pun intended)?
314 points
Ifly answered one year ago …
Redlodge75
If you are going to trade options you should have a trading plan to take the emotion out of the trade. The plan would include predetermined actions for all the available outcomes. eg if the stock drops, at what point do I take the profit (buy back the short call)
Another thing is to understand what you are trading. Long stock and a short call is the same as a synthetic naked put (limited upside potential, unlimited downside risk) In my opinion not a good way to trade.
Regards
Ifly
126 points
dnce answered one year ago …
Since it is a covered call, you want to buy it back at lower cost to pocket the profit and also to insure you don't get called away at expiration, thereby retaining the stock. As I understand it, a covered call is something like an insurance policy on a position you want to retain, but see it trading lower in the short term.
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109 points
act answered one year ago …
Covered call strategy optimizes a bullish trend in the stock as well as stagnant and even slightly bearish. You should know your stock and historic movements. Since this is never guarenteed, as Ifly says, you have to have a plan. If it goes agresively bearish you could adjust the trade by buying back the short call roll out to another call further in time and down one more strike price. You can also add a protective put, buy to open a long put, which would make this a collar trade. Optimally this original trade should allow the short call to go in the money, take assignment, realize your profit and move on. Unlike what chaos said, a short call does not expire in the money, it gets assigned.
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