Covered Call Writing: Allowing Assignment When The Options Are In-The-Money

The purpose of my articles is to always elucidate typical scenarios that may come up and as conservative but rather active investors looking for control we have to be able to understand what we're doing and how the mathematics behind a particular trade are structured. For instance, when we sell a covered call and the share price goes up dramatically, the option we sold gets deep in-the-money indicating we brought our profits to the highest possible level.

With plenty of time left before expiration, we can decide to buy back the option and sell the stock, or to express another way, close both legs of the trade. Nonetheless, most retail investors/the common option seller don't get it when we decide to pay more for the option than we got initially, thinking it leaves them in a very unpleasant and losing feeling. Why don't we take a look at a real-life scenario? Just to be fair, exit strategy execution one element of successful option selling that is commonly misinterpreted by the average investor. So always keep in mind that we'd better not fail to focus on our main principal: understanding what we're talking about and how we control our trades using a wide variety of exit strategies. For purposes of showing you when it pays to close both legs of the trade, I've already written an article which you can read here. In this article, I just want to make you aware of allowing assignment, which is another - more often than not - overseen choice we have as option sellers.

Back in 2017, on January 25, Thor Industries (THO) was trading at $101.54 and covered calls with a strike price of $100 expiring on February 18, 2017 were sold for $3.43. As you can notice from the chart right below, there was no upcoming earnings release and the technical indicators underpinned bullish momentum.

Now, we sold an at-the-money call (more or less) or slightly in-the-money call. As you know that implies the following three consequences:

  • No upside potential
  • Downside risk protection
  • Lower breakeven level = more conservative = substantial edge compared to traditional investing
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