Vol# 4: Exit strategies: When do you bail on a covered call

Plan on the Exit for the transaction before you get into it!!!


This is probably the most important part of the calculation. If you didn't do throughly homework on the stock you purchasing, you must at least plan on exiting the transaction and calculating ALL of the possibilities for this investment. You should never enter a transaction without planning on the exit.

The ideal case for most covered calls is that the stock price remains the same and you collect the premium. But you have to be prepared for ALL the other possibilities as well. What happens if the stock suddenly take a plunge downward on you? Do you keep the current option open and let it expire, or do you roll down the option to the next lower strike price? What happens if the reverse scenario occurs and the stock suddenly shoots up on you? Are you going to leave the option and get assigned at expiration or are you going to roll up with the stock price?


If you do not plan at all on an exit strategy you may end up wondering how in the world you lost on this transaction when the expiration date comes. By planning on an exit strategy early and writing it down in your worksheet you are also able to check your position at any time during the expiration time frame and deciding if it is still make sense to remain in the position.

To me, that’s the best way to decide if you should exit a stock. If you can say to yourself that this is a good buying point, then you should stay invested. If you aren’t sure if you would buy the stock at the current price, get out. I always wonder those analysts analysts who rate a stock a “hold”. Who would hold the stock with prediction that it won't go up at all. All stocks should be only either a buy or a sell. If you aren’t sure, then it is a “do not hold” because another stock is probably a better place to invest your cash.

For example, if I got assigned a stock from a naked put, I immediately sell a covered call on it the following trading day. A predefined strategy and then the only decision I have to make is at what strike to sell the covered calls base on the stock's situation.


Have fun and Always begin with an end in mind!!