Buying Back Your Covered Calls And Cash Secured Puts

In my experience with trading options, one strategy that has proven useful is buying back put and call options. This technique allows me to reduce risk and potentially profit from changing market conditions.

buying back your calls

When I buy back a put or call option, I am essentially closing my position before the expiration date. This can be particularly beneficial if the option’s value has increased, resulting in a profit. Additionally, it allows me to free up capital and reserve funds for other investments, which I find advantageous in maintaining a diverse portfolio.

Understanding when and how to buy back options is crucial in maximising my returns and minimising potential losses. Learning the details of this strategy has significantly improved my trading experience and enabled me to be more confident and knowledgeable in the market.

What are cash secured puts and covered calls?

A call option gives me the right, but not the obligation, to buy the underlying asset at a specific price (known as the strike price) before a certain date (the expiration date). If the asset’s value increases above the strike price, I can exercise my call option to buy the asset at the lower strike price, potentially profiting from the price difference.

On the other hand, a put option grants me the right, but not the obligation, to sell the underlying asset at the strike price before the expiration date. This type of option can be beneficial if I believe the asset’s value will decrease, allowing me to sell it for more than its current market value.

Both puts and calls can be bought and sold in the options market. When I buy an option, I pay a premium for the right to exercise it. This premium can fluctuate as the underlying asset’s value changes and as the option gets closer to its expiration date.

Here’s a summary of the key differences between puts and calls:

OptionRightUsed when expecting
CallBuy the assetPrice to increase
PutSell the assetPrice to decrease

It’s essential to keep in mind that options trading carries risks, and you must carefully consider my financial goals, risk tolerance, and level of experience before participating in this market.

Why is buying back your options a good idea?

As an option trader, there are times when I find it necessary to buy back options, whether they are puts or calls. There are several reasons for this, including managing risk, profit-taking, and avoiding exercise of the options. In this section, I will discuss these reasons in greater detail.

Managing Risk

One of the main reasons I buy back options is to manage risk in my trading portfolio. When I sell an option, I expose myself to potential losses if the underlying asset moves against my position. By buying back the option, I can eliminate the risk associated with this position and reduce my overall exposure to market movements.

For example, if I have sold a call option and the underlying stock’s price starts to rise, I may choose to buy back the call option to limit my risk of potentially unlimited losses. Similarly, if I have sold a put option and the stock price starts to fall, I can buy back the put option to protect myself from further downside risk.

Profit Taking

Another reason for buying back options is to lock in profits. As the value of an option changes with the movement of the underlying asset, I can potentially capture profits by buying back the option at a lower price than I initially sold it for.

  • Call options: If I have sold a call option and the underlying stock’s price starts to fall, the value of the call option will also decrease. I can buy back the call option at this lower price, pocketing the difference as profit.
  • Put options: If I have sold a put option and the stock price starts to rise, the value of the put option will decrease. I can buy back the put option at a lower price, securing the profit from the trade.
buying back options puts and calls

What is the benefit of buying back options before expiration or exercise?

Finally, I sometimes buy back options to avoid the possibility of the option being exercised. When an option is exercised, I may be required to buy or sell the underlying asset at the specified strike price, which may not align with my current investment strategy.

By buying back the option before it reaches the expiration date or is exercised, I can avoid this obligation and retain greater control over my trading decisions. This can be especially important when dealing with options that are in-the-money and near expiration, as these options have a higher likelihood of being exercised.

What factors should you consider when buying back options?

As an options trader, there are a few factors I need to consider when buying back options, whether they are puts or calls. I will discuss these factors in sections Time Remaining, Price Changes, and Volatility.

Time Remaining

One of the factors that can influence my decision to buy back options is the time remaining until the option’s expiration date. Generally, the more time remaining, the higher the option price, and the less time remaining, the lower the option price. When deciding to buy back, I assess whether the time value is favourable for me or not.

I consider the following elements:

  • How much time is left until expiration?
  • Has a significant change occurred in the underlying asset which may influence the option price?

Price Changes

Price changes in the underlying asset are another important factor that affects my decision to buy back options. If the underlying asset’s price moves in a direction that makes my options position less profitable, I may choose to buy back the option to minimise my losses. On the other hand, if the price moves favourably, I may decide to sell the option to lock in the profit.

I consider these questions:

  • Has the price of the underlying asset moved significantly since the option was sold?
  • Am I confident the price will continue moving in the favourable direction, or do I believe it will reverse?

Volatility

Finally, the level of volatility in the market can influence the premium of an option and my decision to buy it back. Higher volatility can result in higher option premiums, whereas lower volatility can lead to lower premiums.

To understand how volatility impacts my buyback decision, I consider:

  • Is the current market volatility higher or lower than when I sold the option?
  • Do I expect future volatility to increase or decrease?

What strategies are their for buying back covered calls and cash secured puts?

As an options trader, I’ve found that buying back options can be a smart move to manage risk and maximise returns. In this section, let’s discuss some popular strategies for buying back options: Rolling Forward, Rolling Up, and Rolling Down.

Rolling Forward

Rolling forward involves closing my current short options position and opening a new one with the same strike price but a later expiration date. This strategy allows me to extend the time I have to be right about the market direction while collecting additional premiums.

I often use this strategy when I believe the position still has potential, but I need more time for it to move in my favour. Here’s a step-by-step example:

  1. Close my current short put options position by buying back the option.
  2. Sell a new put option on the same underlying asset with the same strike price but a later expiration date.
  3. Collect the premium from the new option sale.

Rolling Up

Rolling up is a strategy I apply when I want to take advantage of a bullish market trend. It involves closing my current short options position and opening a new one with a higher strike price but the same expiration date.

This approach lets me lock in profits from the initial trade and collect additional premiums with the higher strike price. Here’s how I do it:

  1. Buy back my current short call option.
  2. Sell a new call option on the same underlying asset with a higher strike price and the same expiration date.
  3. Collect the premium from the new option sale.

Rolling Down

When the market is bearish, I utilise the rolling down strategy. It entails closing my current short options position and opening a new one with a lower strike price but the same expiration date.

This method helps me reduce potential losses and collect additional premiums by adjusting my position to reflect the market sentiment. Here’s my step-by-step process:

  1. Buy back my current short put option.
  2. Sell a new put option on the same underlying asset with a lower strike price and the same expiration date.
  3. Receive the premium from the new option sale.

What are the tax implications of trading options?

As I trade options, it’s crucial for me to understand the tax implications associated with buying options back (puts and calls). This can greatly impact my overall returns and help me lower my taxable amounts. So, I make sure to stay informed about any tax legislations that apply to option trading.

In the UK, the profits from trading options might be treated as Capital Gains Tax (CGT) or Income Tax, depending on the frequency of my trading activities and whether I engage in this as a profession. To keep track of my transactions and calculate my taxes accurately, I maintain detailed records of all my buys and sells.

Maintaining accurate records in Googlesheets also helps me monitor my performance, evaluate risks, and make better-informed trading decisions in the future. I usually take note of the following information:

  • Date of the transaction
  • Type of option (put or call)
  • Number of contracts
  • Strike price
  • Expiration date
  • Premium paid or received
  • Transaction costs (like commissions and fees)
  • Profit or loss from transactions

To simplify record keeping, I often use a spreadsheet, with each row representing a transaction and columns containing the aforementioned details. This allows me to filter, sort and analyse my options trading activity with ease.

I also ensure I keep my trading records for at least six years, as required by HM Revenue and Customs (HMRC). This protects me from potential audits or inquiries and ensures I have all the necessary information to file my tax returns accurately.

Summary

In my experience, buying back options, both puts and calls, can provide notable advantages for investors. By closing positions before expiration, one can lower risk exposure and lock in potential profits.

Here are the key points to remember:

  • Buying back options can help secure gains and minimise losses.
  • It allows for better management of risk exposure in my portfolio.
  • Acting early can save the potential cost or obligation associated with assignment of puts or calls

As with any investment, it’s critical for me to understand the underlying mechanics and make informed decisions. It’s essential to regularly analyse my portfolio to identify the right opportunities to buy back options, ultimately achieving a balance between potential risks and rewards.

Read Also: When Should You Sell Covered Calls

FAQs

Q: Can buying back options help manage risk?

A: Yes, buying back options can help manage risk by reducing exposure to market movements and potential losses.

A: Popular strategies include Rolling Forward, Rolling Up, and Rolling Down.

Q: How can I keep accurate records of my options trading activity?

A: You can maintain detailed records of all your buys and sells using a spreadsheet, with each row representing a transaction and columns containing details such as the date of the transaction, type of option, number of contracts, strike price, expiration date, premium paid or received, transaction costs, and profit or loss from transactions.

Q: Is options trading suitable for all investors?

A: Options trading carries risks, and it’s crucial to carefully consider your financial goals, risk tolerance, and level of experience before participating in the market. After speaking with several option sellers, they all say that understanding and learning to sell options does have the ability to change your life for the better.

Kevin S

Kevin S

Greetings, I'm Kevin! I am now a full time options trader and investor. I am thrilled to have the opportunity to share my knowledge and expertise with you. My objective is to assist you in navigating the complexities of option trading, regardless of whether you're a beginner or an experienced trader looking to enhance your skills. I'm excited to accompany you on your journey to mastering the art of option trading. Let's make this year an extraordinary one for you!
Kevin S

Kevin S

Greetings, I'm Kevin! I am now a full time options trader and investor. I am thrilled to have the opportunity to share my knowledge and expertise with you. My objective is to assist you in navigating the complexities of option trading, regardless of whether you're a beginner or an experienced trader looking to enhance your skills. I'm excited to accompany you on your journey to mastering the art of option trading. Let's make this year an extraordinary one for you!

About DividendOnFire.com

Welcome to Dividend On Fire, we are a site dedicated to options trading! We specialize in helping investors generate passive weekly or monthly income through selling cash secured puts and covered calls.

Recently Published Guides