When I sell a covered call and the stock runs up in price, is there a certain point at which I'm better to close out the position early, rather than hold until the stock is called away at expiry? (November 11, 2001)
If a stock you want to keep turns on you and runs instead of falling, keep your head. Is there resistance nearby up ahead (maybe why you sold the call)? Has the move up been on light volume? Those factors could cause you to wait to see if the move is going to stall again and the stock fall. You might not get out with a gain, but you could get a better price to buyback at if it does fall. If it is running on strong volume or breaks resistance we try to let it take a breather and come back to us or let it come back to test that resistance. Again, might not come out ahead, but we get a better exit point. If it does break resistance, we prefer to cut the play off fast because the reason we entered is not there, i.e., resistance did not send it back down.
If a stock is racing ahead and it is 2 or 3 weeks before expiration we have some problems. If the option sold gets $5 or more in the money, we could get called out before expiration. Moreover, the option we sold will mor than likely have a higher volatility component due to the big move up, making repurchasing them more expensive. The closer the option gets to expiration, the lower the time value making the buy back less expensive from that aspect, but the more likely we get called out if deep in the money. Remember, stocks don't run up forever; they will come back after a strong move. Keep your head and use what you know about the market and stock movements to make rational decisions. If the stock broke resistance and then falls back to that level but starts to bounce, don't let emotion overrule judgment, hoping it will break that former resistance level. Odds are it won't. Do what you have to do and look for the next entry point.
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