Can you buy back the covered call option you wrote (sold)?
Do you have to buy back a call option before it expires?
Do you need a buyer to write (sell) a call option?
Do you receive the premium if you sell a call option?
How do I close my covered call option?
When does a call or put option expire?
When should you roll a covered call option?
When is the best time to use a covered call option strategy?
When to use a protective put option strategy?
What to do when a covered call has expired?
What happens to a covered call option, which is expiring in-the-money?
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Can you buy back the covered call option you wrote (sold)?
You can buy back a covered call you wrote any time before it expires. Since the time premium on the covered call works in your favor (it decays), buying back the covered call should be part of your trade design before you originally sold the covered call.
If the strike price of your covered call is at or below the price of the underlying stock, you will have to buy back the covered call before it expires if you wish to keep the shares of the company.
The only time you should not buy back the covered call is when the call option will expire worthless and it does not make financial sense to close out the current call option and roll it forward to a new one. Keep in mind, when you buy back the covered call, you will pay a commission and an option trading fee.
Do you have to buy back a call option before it expires?
No. Only if it makes economic sense to buy back the covered call. Covered call options have a time premium that decreases in value as the option approaches the expiration date. This is the return the option creates for you. For out-of-money covered calls you need to decide whether to close out the option or let it expire. If the strike price is above the current price of the underlying security, you can let the option expire worthless and collect the entire time premium. If the strike price is at or below the price of the underlying security, at-the-money or in-the-money, you need to decide to either buy back the option or let it be "called". This means your stock will be sold at the strike price. You will receive the proceeds of the sale of the stock and the premium from the covered call option you sold.
Do you need a buyer to write (sell) a call option?
Yes. Selling a call option is just like selling a stock short. You need someone who is willing to buy the option at the price you want. Fortunately there are several exchanges that trade in options, so there is usually a good market for most options. However, in some cases there may not be that many buyers, so the spread on the bid (what someone is willing to buy price) and ask (what someone is willing to sell price) can be quite large. It is best to check on the whether the market for the options you are considering is fairly liquid before committing to writing (selling) a call option.
Do you receive the premium if you sell a call option?
When you sell a call option you receive the premium as cash in your account minus the commission and fees to complete the transaction immediately after the transaction is completed. Selling a call option is just like selling a stock short. you receive the payment from the buyer of the call option. Just remember that when you sell a call option, you assume the obligation to sell the underlying stock at the strike price, if it is assigned. Fortunately, most call options have a time premium that makes it more expensive for the owner of a call option to exercise it. Should the underlying stock rise to or be greater than than the strike price as the option reaches the expiration date, you should expect the owner of the call option to exercise their rights to buy the underlying stock at the strike price. Should you encounter this situation, you can buy back the call option at the prevailing trading price if you do not want to sell the underlying stock.
If you sold the call option without owning the underlying stock, and you receive an assignment, you must buy the stock to full fill your obligation. Normally, your broker will complete this transaction for you.
How do I close my covered call option?
To create a covered call option you had to sell (write) a call option what was purchased by another investor. If you decide that you should close your covered call option, you will need to buy it back with an order sent to your broker. You can issue a market order to buy back the covered calls. In this case, the order will be executed at the next available price. Or you could issue a limit order which will be executed when the bid price is encountered. The risk of a limit order is your order may never be executed.
Closing your covered call ends your obligation to sell your underlying stock at the strike price, should you receive an assignment. For American options you can receive an assignment at any time. As long as there is a time premium for the option, it is unlikely that your options will be assigned, as it would be less expensive for an investor to buy the stock rather than exercise an option they own. European options are only assigned on the last day of the option's life.
When does a call or put option expire?
Stock options expire on the third Friday in the expiration month. Although the option actually does not expire until the following day (the Saturday), a public investor must invoke the right to buy or sell the underlying stock by notifying their broker by 5:30pm New York time on the last day of trading.
If this third Friday happens to be an exchange holiday, then the last day of trading for expiring equity options is the day before, or the third Thursday of the month. Check with your brokerage firm about its procedures and deadlines for instructions to exercise equity options.
The Chicago Board of Options Exchange (CBOE) provides an expiration calendar for listed options.
The last day to trade an index option depends on whether the option is American- or European-style For American-style index option contracts the last trading day is generally the third Friday of the expiration month, unless that day is an exchange holiday in which case the last trading day will be the previous day, or Thursday.
For European-style index option contracts the last trading day will be the business day (generally a Thursday) preceding the day on which the exercise settlement value is calculated (generally the third Friday of the month unless that day is a holiday).
An American-style index option may be exercised at any time prior to its expiration, or at any time up to and including the Third Friday of the expiration month. A European-style index option may be exercise only during a specific period of time just prior to its expiration - generally on the last Friday prior to its expiration date.
When should you roll a covered call option?
Fortunately, a straightforward analysis will help you made your decision. Basically you compare the return per day on the current covered call with the net return per day from another call. If the new call has a higher return then you should buy back the existing covered call and consider selling another one. This is call rolling forward.
When is the best time to use a covered call option strategy?
Like so many things, the answer depends on your specific situation. If your strategy is to protect an existing stock position then you will look to sell a covered call when the price of the underlying stock is at an interim high. This gives you the best opportunity to take advantage of the decay in time premium.
When to use a Protective Put Option Strategy?
The investor employing the protective put strategy owns shares of underlying stock from a previous purchase, and generally has unrealized profits accrued from an increase in value of those shares. He might have concerns about unknown, downside market risks in the near term and wants some protection for the gains in share value. Purchasing puts while holding shares of underlying stock provides this protection.
Often protective put options are purchased before an event that might cause a temporary drop in the stock, such as an earnings announcement. At Trading Online markets we will buy protective put options for stocks that have higher volatility and have reached an interim top as indicated by the relevant technical analysis.
What to do when a covered call has expired?
If your covered call has expired you do not have to do anything. If the covered call was out-of-the-money, meaning the strike price was above the closing price of the stock on the Friday before the expiration date, the option is worthless. This means you get to keep the premium you received when you sold the covered call as income to you. This is one of the advantages of selling covered calls. Their time premium decays and eventually reaches zero when they are out-of-the-money and you get to pocket the money.
Your next step should be to analyze when to sell another covered call to provide downside protection to your stock and to generate additional income for your portfolio.
If your covered call expires and it is in-the-money, meaning the strike price of the option is below the closing price of the stock, then it will most likely be assigned. When an option is assigned, the underlying stock is sold for the strike price. You receive the value of the stock and you get to keep the premium you received from selling the covered call option. This is why it is a good idea to decide to keep the covered call or buy it back before it expires before the expiration date.
What happens to a covered call option, which is expiring in-the-money?
A covered call option that expires in-the-money, results in the sale of the underlying stock at the strike price to the owner of a call option. If you owned the underlying security and the covered call, you receive the proceeds from the sale of the stock at the strike price. In addition, you keep the premium you received when you sold the covered call option.
On the expiration date, the Saturday following the third Friday of the month, the option contract ends after the terms of the contract have been fulfilled, i.e. the shares of the underlying stock have been sold.
If you want to learn more about using options consider reading Options Made Easy: Your Guide to Profitable Trading (2nd Edition) by Guy Cohen. It is a good way to help you to get started learning how to use options to improve your returns.
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