When You Have Better Opportunities for CapitalĪ second consideration for taking profits off the table early revolves around the opportunities that you have to create separate income from your investment capital. Therefore, in many cases, an analysis of the reward to risk for the trade would tell us to go ahead and take the profits now rather than waiting for the calls to expire.Ģ. If this happens, we would see our potential profits narrow or even reverse. It is possible that there is very little additional reward (or profit) left for us to capture, but there is a risk that the stock will trade back below our strike price. So if the majority of the potential profit for the trade is available now, we should consider the current reward to risk for the trade as it currently stands. If the stock trades significantly above the strike price, it is very likely that the majority of profit that we will receive in the trade is available now, without waiting until the call option is actually exercised. But the timing of the trade is still important. We have already noted that a successful covered call trade does not add additional profit for advances above and beyond the strike price. When the Stock is Vulnerable to a Decline There are essentially two primary situations in which it may make sense to close out a profitable covered call trade early.ġ. However, there are certain times where it may make sense to go ahead and close out a covered call trade to lock in profits, depending on your particular situation and the environment for the stock or ETF that you are currently trading. We are obligated to sell our stock at the strike price whether it closes $0.02 or $200 above it.įor this reason, when covered call trades are working in our favor, we typically do not close the trades out early, as we do not realize a larger profit simply because the stock is trading at a peak value. It does not matter how much higher the stock is trading, only that it is above the strike price. It is important to note that our maximum profit is realized if the stock closes above the strike price when the call option contracts expire. This caps our potential profits at a pre-determined level, and in return, we receive income from selling the call option, known as premium. By selling the call options, we obligate ourselves to sell the stock at the option's strike price should the stock price rise above this level before the option expires. But for the most part, you can set up a covered call position and then wait until the calls expire before any additional action is needed.Īs a quick reminder, the covered call strategy creates regular investment income through the process of buying shares of stock, and then selling corresponding call option contracts for these same shares. Of course, it is always important to monitor all of your positions to ensure that your risk is under control. One of the great benefits of the covered call strategy is that you can create income from your investment portfolio by essentially "setting and forgetting" each individual trade.