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The overall guideline remains the same: Never sell a covered call unless you are willing to go through exercise and give up 100 shares of stock at the striking price. The strategy is twofold: If you would prefer to keep the stock for long-term investment growth, you need to view calls as current income generators, while also accepting the possibility that the calls might be exercised.
Call sellerseven after picking strategies wellmay experience a rise in the stock and later wish to avoid exercise, in order to (a) achieve higher potential capital gains, (b) augment call premium income, and (c) put off selling a stock that is increasing in value.
You avoid exercise in two primary ways: by canceling the option or by rolling out of one option and replacing it with another. The following example is based on a situation in which unexpected upward price movement occurs in the underlying stock, placing you in the position where exercise is likely.
Example: Paper Profit Problems: You sold a May 35 call on stock when the stock’s market value was $34 per share. The stock’s current market value is $41, and you would like to avoid exercise to take advantage of the higher market value of the stock.
Method 1: Cancel the option. You can cancel the option by purchasing it. Although this creates a loss in the option, it is offset by a corresponding increase in the value of the stock. If time value has declined, this strategy makes senseespecially if the increased value of stock exceeds the loss in the option.
Example: Short-Term Loss, Long-Term Gain: You bought 100 shares of stock at $21 per share and later sold a June 25 call for 4. The stock’s current market value is $30 per share and the call’s premium is at 6. If you buy the call, you will lose $200; however, by getting around exercise, you avoid having to sell the $30 stock at $25 per share. You now own 100 shares at $30, and are free to sell an option with a higher striking price, if you want.
In this example, the outcome can be summarized in two ways. First, remember that by closing the call position at a loss, you still own the 100 shares of stock. That frees you to sell another call with a striking price of 30 or higher, which would create more option premium. (If you could sell a new option for 2 or more, it offsets your loss in the June 25 call.)