Covered Call: What to do when stock falls rapidly by Mark Wolfinger on 06/10/2005
I just came across this article while trying to learn how to roll out of a covered call position.

You mention that you buy back the call option.  Technically speaking what is happening 'under the covers' here?

1) Does the brokerage put a hold on my stock that I use to secure the covered call that I write?
No, not really a 'hold.'  But unless you have permission to write naked (uncovered) calls - which is
unlikely, you cannot sell your stock unless you cover (repurchase) the call you sold earlier. 

Writing naked calls is quite risky and some brokers never allow customers to do it, and others
limit that permission to very experienced investors.
2) When you say "buy back the call options" is this just a standard market order for the same strike and expiration?
Yes.  But it's better to use a limit order than a market order.  I suggest never using market orders when
trading options.

3) How does this (relating to question 1) remove my stock from being obligated?
By writing a call option, you become obligated to sell 100 shares of stock, at the strike price, if and only if
the call owner elects to exercise his/her rights to buy your shares.

Once you cover the option you sold, that obligation ends.

But, when you 'roll' your position, that means you are writing another call to replace the one you just
covered.  If you do not plan to 'roll the position,' then you are using the wrong terminology.  If by 'roll
out of' you mean that you want to buy back the call and NOT sell (write) another call, then the term
'roll' does not apply.

My goal is long term. I wish to hold my stock positions during the ups and downs and try to collect a few premiums
along the way.
One of the truths about writing covered calls is that sometimes the stock rises above the strike price.
If that's the situation when expiation arrives (although it may happen sooner), the call owner is going to
exercise and buy your stock.  To prevent that, you must repurchase the options written before you are
assigned an exercise notice. Once you receive that exercise notice, the stock has been sold and the
transaction cannot be undone.  Of course, you may repurchase the stock, but you have sold your shares.

I appreciate your insight on this.
Please let me know if anything remains unclear.
Best regards,
Lance James

Mark D. Wolfinger
The Rookie's Guide to Options:
The Beginner's Handbook of Trading Equity Options
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