The seller of a CALL Options contract is generally bearish that the share price of his stocks will not rise above the strike price on the expiration date so that he will collect the full premium without being obliged to sell any shares.
When the share price drops after I sell a CALL contract, what I like to do if the share price plunges or the premium drops significantly, I will close the CALL contract and open another new contract, selling a new CALL contract either at a lower strike price or a longer expiration date.
This is because as options sellers, the maximum returns are capped, by the total premium received from every contract. In a CALL contract, it does not matter if the share price is lower by $1 or $100 upon expiration, the premium will always be the same. While the premium is capped, it is proportional to share price, i.e. when share price goes down, the premium goes down as well.
Thus, the way to get the most out of CALL contracts is to close them whenever the premium drops significantly (due to a drop in share price) and open up a new contract (sell another CALL contract with a new strike price or expiration date) to earn more premium. This method helps to lock in the profit and prevent the risk of the share price’s sudden spike up, which can cause premiums to go up again.
In essence, it is about re-adjusting the strike price to one that is lower (to align with stock trend) and thus helps collect more premium for the options contract seller. An example of how I roll CALL option contracts to maximise gains can be found in this article:
How To Generate Returns When The Market Is Going Down
I hope this sharing is useful and help you get the most out of your trading positions.
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Keen to learn about options trading but do not wish to pay for expensive courses, this newbie guide will help gain the knowledge and fundamentals to understand options better. And it’s totally free!
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