Covered Calls for Fun & Income

Adjusting Positions

How to Adjust Open and Expired Covered Calls

Probably the most difficult thing to learn is how and when to adjust an open covered call position. Actually, I have not been able to find much about this on the internet. Most sites just tell you how to get in and how much money you can make. They never talk about what to do if the underlying goes bad or it gains considerably, or what to do at expiration if you are OTM.

I am going to attempt to do that here and give you my insight based on my actual trades (I have been confronted with each of these scenarios several times). Unfortunately this is not an exact science. These are simply guidelines I use to make decisions

Let’s cover the following scenarios:

1) The underlying is gaining in price and has passed the strike price of your short Call and expiration is several days away.

How many times has this happened to you only to have the price pull back and leave you with an OTM condition at expiration? This is a judgment call, but I believe in getting out thus reducing your risk.

For instance, if my ITM gain would be 10% with expiration a week or two away, and has a current gain of 5-8%, I will exit immediately. Remember, as Kramer would say (whom I not longer watch), “Bulls make money, bears make money, pigs get slaughtered!” The one thing he is right about.

Ok, so now you are out of the trade and its 1-2 weeks before expiration – that means you have cash and can do another Covered Call with expiration only 5-10 days away. There are many times I have made up 2-5% with another Covered Call that was 5-10 days from expiration. Yes, this means a lot of transactions, but that’s why I prefer Interactive Brokers for their very low fees.

Remember, the shorter the time you hold you position, the lower your risk is.

2) The underlying is falling in price and has passed your Cost Basis and expiration is several days away.

Honestly, I have never closed a position that was decreasing in value prior to expiration. If the situation is really bad you may have a hard time buying your Call back when you close, and your transaction costs will double needlessly. I wait until after expiration and assess the stock the following week.

I will watch the stock price for a few days and use that data to decide. One aspect that influences my decision is if the stock has a dividend and I was holding during the ex-dividend date and the payout is within a week or two.

If the stock continues tending down I will exit and take my loss.

If the stock is consolidating and not going anywhere and it’s not too far from my cost basis, I will consider writing another Covered Call against it to bring my cost basis down, or I will enter a limit order at my cost basis and let that bake for a few days to see if it sells. This, theoretically, gives me a zero gain/loss.

There are times, although rare, that the stock recovers, passes not only your cost basis but also your purchase price and gives you a nice return – all within a week or two after expiration. When this happens I use a trailing stop.

Remember, you will have losses and you have to accept them. Exiting a loser also frees up cash for more profitable trades.

3) Your Covered Call expired OTM but near the original strike price.

Outlook bullish: enter a limit order on the stock at the previous Call Option strike price.

Outlook neutral: write the next month Call at the same strike price or enter a limit order on the stock at the previous Call option strike price.

Outlook bearish: exit the stock on Monday for the best price you can get.

4) Your Covered Call expired OTM and well below the original strike price.

I use the methodology outlined in 2 above.

5) Your Covered Call is ATM or slightly ITM and its a few days prior to expiration and price action is bullish.

If I am bullish on the stock and don’t want to be called away, I will roll to a higher strike price for the following month. This doesn’t happen very often since I prefer to not be in a stock any longer than the current expiration month. However there are some cases where I do want to hold on if I have a long-term bullish outlook on the stock.

In most cases I will do nothing and let it assign at expiration.

I know I have not covered all scenarios here. If you have one that you have a question on, please post a comment on this blog or join the Yahoo Just Covered Calls group and post your question (you will find the link on the right).



  1. Hi Jeff –

    At work I’m unable to access the Yahoo Groups (security issues) so I will post here.

    I’m a virgin to this but there are several other strategies to maintain profitability w/o having to take a loss as described in 2 & 5 – or so I have heard. As I am in my first month I’ll let you know how it goes…

    Comment by Dennis — April 29, 2009 @ 5:18 PM

  2. Dennis what other adjustment strategies are you talking about. can you give some examples

    Comment by David — June 20, 2009 @ 4:34 PM

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