No. of Recommendations: 7
If stock falls quickly and premium gain occurs quickly (like 50% gain in 1 month), consider covering call.
Agree with all that the previous responders have said.
Additionally, if the stock goes UP more than the premium is worth, what will you do?
Let it go and forego (sp) the gains?
I find this is one of those times that "extend and pretend" is actually the best approach. Roll up and out, in the paralance.
Say you have written June covered call options.
The stock price recently has risen above the strike, so the outcome will be in a loss on a mark-to-market basis and the stock will get called away soon.
(basically nobody ever exercises a call while it still has time value left, it makes no sense to do so)
You can close that position for a loss and write new calls, say for September or January, that have a high enough time premium to overcome the loss and add a (small) profit if they expire worthless.
Longer time means more time premium.
This sounds a bit like a dumb martingale bet, doubling down on a bad bet, but not really: the higher the price, the higher the valuation multiple, and the less likely it is that the stock will go that high in any shortish time frame.
So you're doubling down, but the odds in your favour are better each time you do so.
You won't make a lot of money, since you entered your covered call too soon. But you'll likely still make money.
You also probably save the inconvenience, and perhaps tax consequences, of having to replace stock that has been called away.
Jim
