Options expiry creates a challenge for the covered call writer when the share price is riding above exercise price.

Such a situation creates a number of choices and can be particularly an issue for those who may have held the basket of shares in a specific company for some time..no matter how much the textbooks state the dangers of emotional involvement in the market, some may still feel a bond to XYZ if they have served them well in the past. As we have covered in previous editions, exiting a trade is as, if not more, important than your entry strategies. Yes of course you could hold a stock eternally and historically this has proved a popular and profitable strategy for many. However, ask those who have held Telstra, whether this has worked for them. Why not optimise your growth by adopting even a low intensity hands on approach?


So to your choices in the initial scenario described ..there are three alternatives if you have sold an XYZ call at an exercise price and with days to go, the share price is riding higher and there is a likelihood that you will be exercised.

These are:

a	Simply let the stock go
b	Buy back the call (closing your original position) and wait until another opportunity arises to write a call for another month
c	Roll the call over to the subsequent month at the same or an alternative (usually higher) exercise price.

4. Making the difference

There are a few issues that may influence your decision making:

Your view of the short term price of the stock…from a personal perspective the bottom line question is simply, “would I buy this stock today?”. Using whatever technical and/or fundamental indicators that are part of your plan this decision should be relatively easy to make. For example, if the share is trading above the identifiable support and the short term moving average is above the long term this may be an indicator to buy back your call or roll over the call to the subsequent month (at the same or higher strike).
Are the indicators pointing to a sell?. If so then let it go! Easy!!!!

Is your belief about the stock is neutral then you may either choose to roll over at the same price or decide to let the stock go.

KEY DECISION POINT: if there are other shares that appear to be a better prospect by staying in this position are you losing opportunity by holding?

If you are trading under an entity that has capital gains implications then and you have held the stock for nearing the year point then it may be in your interest to buy back the call to ensure you continue to hold the stock irrespective of your short term view of the stock to get the CG benefits
If the whole market appears to be in a downturn you may consider letting it go and protecting premium either by withdrawing money out of the market or writing future calls at a lower exercise to offer more downside protection or protect your position through using a put option underneath your share holding.

We recognise these are sometimes a little difficult for the less experienced investor so we have developed a seminar programme to help grow the knowledge required.

Using the Horizon Professional LOTS system, we promote the use of clear objectives to dictate all our trading decisions..the main reason for this is that you can take every single decision back to these objectives…

Ask yourself does my potential course of action fit with these objectives?

If yes then Do it..if no then don’t!!

If you are not sure then it is better not to..err on the side of safety. Happy and profitable decision-making.

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