With the market now down 1.25% on the day, some of our buy-writes are reaching, or breaking, our break-even levels. If this selloff continues, we may need to exit or adjust these positions.
If we adjust our buy writes, we will likely close the call we’re short and sell another call, which will further lower our cost basis.
For example:
We are long 100 shares of XYZ and short the January 20 Call
My alert might read:
Adjust existing position: Buy back the January 20 Call, and sell the January 19 Call.
This would then result in us being long XYZ stock and short the January 19 Call.
If you’re able to trade spreads, you can execute the trade as one trade.
If you’re not able to trade spreads, you need to first buy back the call you are short. Once you have done that, you will sell the new call that I recommended.
This is a defensive maneuver to further protect our long stock position.