If I wanted to use covered calls to exit a position much like a limit order, would it be wise to wait for the stock to run near my target, and then sell CC very close to ITM, this way I collect maximum premium?
For example, I’m holding 1500 shares of SOFI from $14.90. I’d be comfortable selling at $28-29 near ATH.
I could just set a limit sell order at $28 and collect my profits. But could I not wait till it runs to 26-27 and sell a call at 28 right at that moment? That way I exit, with a bonus.
Of course there’s a chance my shares don’t get called away, the same as with a limit sell order on my shares, but I’d collect the premium.
Thoughts? I’m new at options, but have been buying LEAPS with some success.
Posted by _subAtom
11 Comments
Your shares don’t get called away as soon as they hit your strike, if the call expires itm they will get called away.
Selling slightly OTM calls that expire in a day or two is not going to net you a lot of premium.
The risk is that it hits your exit, you sell a call, and then the stock craters.
You could also use a collar to prevent this if you wanted to hold. Buy a put, sell a call.
Imagine you didn’t have those shares.
Imagine you wake up one day and see SOFI at 26-27.
In that exact situation, would you sell the 28 Put (yes, ITM) to _maybe_ (with higher than 50% chance) open a position in SOFI and resulting in you holding shares going forward, except if SOFI blows past is ATH, in which case you won’t have any shares, and if it tanks you’ll be holding shares?
If you would (and it was a reasonable, reasoned decision), then yeah, it would make sense to sell your covered call.
Otherwise, it wouldn’t make sense to sell the covered call.
Edit: to clarify that, if you answer “no”, it doesn’t necessarily mean that you should hold your shares, or that you should limit sell then, etc. Those are separate concerns not directly informed by this thought experiment. But it might give you some food for thought.
Nothing wrong with that but.. You have x stock you are happy to sell at 20, it’s 19.50.. You sell 20 call.. It goes to 18… You just keep selling 20 calls.. Then it goes to 28.. And you come here asking what to do because now you lost money.. To which everyone will congratulate you on max profit.
Selling covered calls doesn’t guarantee you an exit when it reaches your target.
Sofi can hit 28 and drop back to 25 by expiration. You’ll keep the premium, but you’ll still have your shares
.
When the market is open (so you can see real bid/ask spreads on the option contract premium) look at the option chain a few weeks out. And look at 28 call since that’s your target strike and look at what the bid/sell the call price is at. That’s what you’ll collect right now (or close to it as you finalize your order) per share. The price of the contract will go up and down as the price of SoFi goes up and down today. I like to sell CC only on a stock price upswing. With SoFi at about $25 the 28 strike is around 57 cents for Sept 18 and $1.25 for Oct 17. Make sure you enter qty of 15 since it is number of contracts.
You get the premium now. If the contract gets assigned / executed (technically can happen at any time at any SoFi price in the market) you will sell your shares at $28. If SoFi goes above $28.01 at expiration it will be automatically executed.
So the question is do you want to sell right now and lock in your gain on price, or do you want to enter a limit order that may not be filled and the stock can drop, or do you want to earn a premium and wait for whatever happens in the stock price? If it tanks only sell now saves you. If it goes up you miss out on the potential beyond $28 but if you’ve made up your mind on selling price, it is just a question of time.
Keep in mind the strike price is not like a limit order price. That’s just the price you agree to sell at during the time your contract is alive (aka open). If you sell the Sept 19 contract and SoFi bounces up and down between now and then including going over $28 that does not mean you’ll be assigned. That’s why the expiration date you pick is important.
Why wait to sell an ATM call? Sell the call ITM right now at the lowest exit price you accept. Collect intrinsic immediately. If shares fall to the strike roll down to collect more intrinsic. Repeat until the shares are called away.
Some people only buy/sell through cash secured puts/covered calls. It avoids slippage and nets some bonus cash to boot. It’s generally not a bad idea on solid stocks but on volatile stocks it could mean you lose the proper timing to sell and may end up bag holding.
With a large paper gain like that, I’d be looking at ways to lock it in rather than how to make a little more gain with a CC. An easy way to do that would be a no cost collar.
An out of the box idea would be to sell the Dec $20 put and sell the Dec $29 call and use the proceeds to buy the Dec $25 put. That could be done for a very small credit. The end result is that on an expiration basis, you’d have $5 of downside protection from $25 down to $20 and $4 of upside gain if assigned on the short call.
If I want to exit a stock that has had a recent run and appears tapped out, but I’d like a little more than the current price and I’m willing to possibly hold it a while longer, I will sell a slightly in-the-money call for a little extra premium. However, if it’s truly at the end of its run it might drop below my strike leaving me with slightly depreciated stock with premium for compensation. From there I can continue to sell ccs until called away or just sell the stock.
If there is a bigger downside risk or my next play is waiting and I need the cash freed up I will just sell the stock and move on.