rgoulston@gmail.com wrote:

Hi

If you go to buy back a call that you wrote --- do you buy it back for the current price?  and therfore take a profit
or loss on the call?  Given that the time value is going down is that a good strategy in certain situations.

thanks
Richard

    Hello Richard,

    Yes, you buy it back at its current price.  I don;' know if you ever sold stock short, but it's the same principle.  You sell the stock (or an option) at one price and buy it back in the future at another price.  When you buy it back yes, you have a profit or a loss, obviously depending on your buy and sell prices.

    Buying back the call you wrote is definitely a good strategy in certain situations.  For example:

1) Expiration is approaching and the option price has dropped all the way to $0.05 or $0.10.  Sure, this option is very likely to expire worthless, but if you wait until it expires to write a new covered call option, you could easily receive a lot less when selling that new call than if you sell it now.  Buying back the almost expired, inexpensive, option allows you to sell now.  Do this only if you would be pleased to collect the current premium on the new call.

2) Option prices sometimes increase dramatically, as a result in an increase in the implied volatility.  When that happens, it's often a good idea to repurchase the option you previously sold - even at an inflated price - because the new covered call option you plan to sell is priced at an even more attractive price.  In other words, if the spread - cover your old covered call and write a new one - is available at a great price, go ahead and make the trade.

3) Sometimes things don't go well and the stock declines significantly.  By buying back the old call cheaply, you get to sell a new call option at a lower strike price and with a more distant expiration date.  This trade might lock in a loss, but by collecting additional premium when selling a new option, you can cut that potential loss (or even eliminate it) significantly.

Yes, there are times to consider buying back the option you sold.

Mark