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"How Do I Keep My Covered Call Stock From Assignment?"


Question By Geoffrey L. Jenkins

"How Do I Keep My Covered Call Stock From Assignment?"

I sold 6 $31 June calls on X company stock and the stock has surged to $39. Is there anything I can do optionwise to keep X shares besides buying back the 6 $31 june calls? Thanks for your help

Asked on 11 June 2009

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Answered by Mr. OppiE

Hi Geoffrey,

I supposed you executed a Covered Call on X shares and have allowed the short Call Options to get deep in the money, right?

In this case, there is nothing more you can do optionswise to keep the stocks other than Buy To Close the short call options. However, if this is a Deep In The Money Covered Call you are doing, then being in the money is the purpose of the position. In which case, all you have to do is to close the short call options during the final moments of Expiration Friday will do.

If this is a regular Covered Call options trading strategy you did on X by writing the out of the money call options, then there are really one of two things that can happen when the call options get in the money. 1, you still think the stock can go up and wants to keep it for the long term, in this case, buy to close the call options before expiration. 2, if you think it has gone up far enough and chasing it at this point makes no sense, then let the stock go into assignment for the predetermined assigned return.




In conclusion, a lot of options trading beginners buy stocks with a lot of fear and wish to use a Covered Call to hedge against downside risk only to regret it when the stock really moves strongly. If you only want protection on a growth stock you intend to hold for a long period of time, a Married Put would serve better.

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Response by Geoffrey ...

When i bot 600 shares of x originally @$20, I just wanted income. I liked the amount of premium being paid on x options. the stock went to $17 and i just kept writing call options and buying them back. This worked very well until x got hot and the mutual funds started buying steel and commodities stock because of weak dollar, inflation, etc. When i wrote the x $31 call it was out of the money and then all hell broke lose. Maybe in a hot market where the stock is surging and I want income, should I have been selling puts instead? I really want to keep x and just use it for income. Thanks again for your help!!


Reply by Mr. OppiE...

This is a lesson in that all options trading strategies have limitations that you must understand before using any. Covered Call is not for stocks that are expected to gain quickly if you want to keep the stocks. In fact, if the stock is surging, you would want to use a pure Bullish Options Strategy instead of a Covered Call. To gain in a hot market with a stock, the best thing to do is just hold the stock or buy more and then protect profits strategically using Protective Puts. The options part can be done with or without the stock and any Bullish Options strategy would do. Yes, writing out of the money put options in a hot market is a good way to generate monthly income if you have the margin for it. In fact, you could write put options whether or not you have the stocks itself, it has nothing to do with your stocks.



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