Rescuing Covered Calls

I received an email recently in which the sender asked for help with a crazy situation in which he spoke with his broker who basically told him it certainly was a “problem”. That situation was he had sold covered calls on a stock only to have the stock shoot far higher. Can he rescue his trade?

Let’s first review the investor question and then look at a few easy strategies to try to rescue or repair this trade.

Investor Questions:

Hi Teddi,

Have ended up in a “problem” – at least that is what the broker is calling it tonight.  Margin acct. and they are using Yesterdays Equity Loan Value. Own 3000 shares of BLUE, but have calls against all shares.  Stock jumped $21 in after hours trading!  Stock was at $48, now $70.  My calls for Dec 20 are at 40 and 45.   My cost basis is $43.34.

Question is:    Is there any way to come out “ahead” – meaning is there anyway for me to reap some of the profit which disappears if the stock is just called away?

Sell the stock and leave the calls Naked, then create synthetic long position to cover calls with Jan or Feb long dated calls?

Buying back calls and selling stock in my experience will just be a losing proposition since the market makers will jack the calls above my profit on a sale.

Any help will be greatly appreciated.  (Of course all I had to do was apply your often noted method — don’t cover all the stock with calls !!)


Some Answers on Rescuing In The Money Covered Calls

It is true that I always recommend for covered calls that an investor not “cover” all his stock with calls unless he wants to be exercised out of his position. By leaving some shares without covered calls, a rally higher in the underlying stock can be easier to repair, allowing the investor to enjoy further profits while still protecting his position.

This article looks at 3 methods to approach this kind of “problem”. The goal is to continue to profit from the rise in the stock while at the same time protect the position from any sudden setbacks or a decline whether in the stock or overall stock markets which usually will impact all stocks.

This strategy article is for FullyInformed Members.

Rescuing In The Money Covered Calls For Further Profits and Protection


Disclaimer: There are risks involved in all investment strategies and investors can and do lose capital. You always trade at your own risk. The author assumes no liability for your investment decisions. Read the full disclaimer.

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