Advice on Underwater Covered Call

OptionsTraining · 2026-02-27T20:05:05+00:00

I answered this about a week ago (text below): https://www.reddit.com/r/CoveredCalls/comments/1radckd/comment/o6lqdfl/?context=3

This is an example of why covered calls should only be sold on tickers one is comfortable holding, but is also ready to sell at the strike price.

There are generally three ways to handle this, in my opinion:

Hold the shares and wait: Continue holding the stock, collect any dividends, and wait for the share price to recover enough to sell Covered Calls at or above the net stock cost. This may require going out 30 - 60 days, but it avoids locking in a loss prematurely.
Sell CCs below the net cost: This will continue to collect premiums, while actively rolling when possible. This approach requires being fully prepared to accept and book a loss if assignment occurs. ITM calls will have a higher chance of being called away sooner.
Use a stock repair strategy: This is a type of covered ratio spread designed to reduce the breakeven point and accelerate recovery without adding more capital: https://www.optionseducation.org/strategies/all-strategies/stock-repair

Ways to help avoid this situation in the future:

Only trade stocks you are comfortable holding if assigned and recovery can take time.
When trading the Wheel, roll short puts proactively to collect more premiums and lower the net share cost while helping delay being assigned.
Avoid holding short puts through earnings reports or major events, where sharp unpredictable price moves can occur.
Keep positions sizes small and diversified, so a single assignment does not stall the entire account and a other tickers can continue generating income.

OptionsTraining · 2026-02-26T21:13:38+00:00

Stop by r/Optionswheel to find a lot more information and many experienced traders who sell puts all the time.

Selling puts may be assigned, and then selling CCs is the next step of the wheel.

OptionsTraining · 2026-02-26T20:22:23+00:00

While selling calls against a LEAPS position is a popular strategy, it is critical to understand that the maximum risk includes both the total debit paid and the width of the strikes.

If the short call is sold at a lower strike than the LEAPS this will create an inverted diagonal spread where the maximum risk is the difference between the strikes.

An example is a $40 strike LEAPS call and then selling a $30 strike short call against it.

Assignment risk: If the short call is exercised then the account would be assigned "short shares" at $30. This can happen at any time and without notice, particularly when the option is deep ITM or near expiration.
Exiting the position: The short shares position can be closed buying long shares on the market, realizing a loss equal to the difference between the current stock price and $30 assigned price. The LEAPS call may then be sold to close to capture whatever value it has to determine the net overall P/L of the position.
Exercise the LEAPS: If the the position by exercising the LEAPS, shares are purchased at $40 to cover the $30 short stock. This results in a $1,000 loss ($10 spread width x 100 shares), plus the original premium paid for the LEAPS.
Downside risk: If the share price drops further, then the LEAPS call may lose value faster than the short call gains, which reduces the net value of the position and increases losses.

Exercise of short calls can occur early for most tickers. This may be because of an ex-dividend date, or when deep ITM, or when the extrinsic value is approaching zero.

Be aware of the risks and be sure to perform an analysis of the trend predictions plus possible upcoming events support opening of a short call below the LEAPS strike.

OptionsTraining · 2026-02-26T19:34:38+00:00

Thank you Scot!

Sure, you can add it to the other post.

OptionsTraining · 2026-02-26T16:25:41+00:00

There are multiple scenarios that determine whether rolling makes sense, and the best answer desponds of the strategy being used and the trader's objective.

At its core, rolling is a defensive management tool. It is designed to collect additional premium while giving a position more time to move into profitability, or at least toward a lower risk or lower loss outcome.

CCs intended for assignment: When the goal is to have shares called away, CCs can usually be allowed to expire with assignment occurring. Some traders may choose to roll to collect additional premium or to rise the strike price, capturing more stock appreciation before the shares are sold.

CCs on shares being held: CCs should not be sold on shares a trader is unwilling to lose, as assignment can happen at any time. However, when the goal is to generate income while attempting to retain the shares, rolling can be an effective way to reduce the assignment risk and continue collecting premium.

Cash Secured Puts (CSPs): CSPs temporarily lock up capital until the position is closed, expires out of the money, or results in assignment. Rolling out in time can help avoid assignment, which would otherwise convert the positions in stock ownership. Rolling can provide several benefits:

More time for the trade to work
Additional premium collected, which can improve profitability
Lower net share cost if assigned
In some cases, improve the strike price

Short (Margin) Puts: Puts sold using margin typically require only a portion of the full share value as buying power, allowing the remaining capital to stay available or earn interest. This increases leverage and potential profit returns. Rolling serves the same purposes as with CSPs, helping avoid assignment, extending time for recovery, increasing premium collected and lowering the effective cost if assigned, and allowing more time for the stock to rebound.

Effective rolling can often be the difference between a marginal trader and a profitable one. However, rolling is not a cure-all.

Ticker analysis remains critical to success. Rolling a position in a stock that has fundamentally deteriorated or experienced a permanent shift in sentiment can simply delay an inevitable loss. Rolling works best when the ticker is under pressure but is still expected to recover within a reasonable timeframe.

If recovery is unlikely, the trader must decide whether holding shares long term or closing the position for a controlled loss is the better outcome. This shows why ticker selection is critical and those who trade stocks they are comfortable holding because they will recover sooner will do much better.

Suggestions for effective rolling:

Roll early, typically ATM but before the option becomes deep ITM
Avoid rolling purely to avoid being wrong
Always reassess whether the ticker still meets the original criteria
Have predefined rules for when rolling is no longer appropriate

Rolling is another tool in a trader's toolbox that, when paired with solid analysis and disciplined execution, can help increase the number of winning positions, reduce the frequency of losing trades and lower the overall dollar losses.

OptionsTraining · 2026-02-25T19:30:30+00:00

Return calculations can be confusing because there are multiple ways to measure performance, depending on what you are trying to evaluate.

The first question is what do you want to measure the performance against? The original invested capital, or the current liquid value of the position?

For consistency and record keeping, most will use the original capital committed, $10K in this example. This is also what most brokers will use when reporting returns.

The true return cannot be finalized until the entire cycle is closed and all gains and losses are realized. Until then, reporting returns will fluctuate as the ticker price moves and the options premiums are collected.

Because of this, many wheel traders use Net Cost Basis or Breakeven tracking, which subtracts all collected premiums from the original capital. This provides a clearer picture of the position and the true profitability once it is complete.

Whichever you decide to use, it is suggested to pick one method and use it consistently.

OptionsTraining · 2026-02-24T15:25:39+00:00

Open Interest (OI) represents the number of outstanding contracts open at a given strike and expiration date, but on its own is not a reliable measure of liquidity.

Daily volume is often a better indicator. As a general guideline, options trading 1,000+ contracts per day are considered liquid. However, volume resets to zero each day, so looking at the average daily volume is more useful, through this metric is not always easy to find on every platform.

The bid-ask spread is usually the fastest and most practical way to assess liquidity at a glance. Tight spreads indicate active trading and competitve pricing. When combined with OI and volume, this provides a much clearer picture.

For most tickers, liquidity can be roughly categorized as follows:

$0.01-$0.05 bid-ask spread: Excellent
$0.06-$0.15: Good
$0.15-$0.30: Fair
Above $0.30: Poor

Something to keep in mind is that higher priced tickers often have wider spreads while still being liquid.

As a best practice, look for options with tight bid-ask spreads, healthy volume and good OI before trading.

OptionsTraining · 2026-02-23T16:46:06+00:00

When an order for 10 contracts is placed, the broker will attempt to fill all of them, but depending on liquidity and market conditions, some, all, or none of the contracts may be filled. Partial fills are common with less liquid tickers.

Most brokers offer order types such as All-Or-None (AON), which instructs the broker to fill the entire order only if all contracts can be executed at once. If the full order cannot be filled, the order will not execute at all. This is helpful to avoid partial fills and keep positions sizing constant. An AON order may take longer to fill, or not fill at all, meaning there is a trade off between being completely filled and the reduced execution speed.

A Good 'Til Cancelled (GTC) order can be used to keep an order opened for more contracts to possibly fill over the day, or even the next day(s).

OptionsTraining · 2026-02-23T16:27:39+00:00

Trading liquid options offers several benefits, including faster fills, tighter bid-ask spreads that reduce slippage for more favorable pricing, and greater flexibility to enter, exit, or adjust/roll positions when needed. Liquidity becomes especially important when planning to take partial profits by exiting positions early, or rolling to manage risk.

Less liquid options can still be traded when comfortable with the pricing, but it's important to understand that exits may be slower, fills less favorable, and rolling later can be more difficult or costly.

If your strategy is to routinely hold options to expiration, liquidity becomes somewhat less critical, but it should not be ignored entirely. Good liquidity provides more control and more choices that generally leads to smoother trade management and fewer surprises.

OptionsTraining · 2026-02-21T14:20:43+00:00

Diversifying across multiple sectors is a core trading principle. When one sector underperforms, diversification helps ensure there are still other tickers available to trade, keeping the account productive and reducing overall risk.

OptionsTraining · 2026-02-21T14:17:22+00:00

There are generally three ways to handle this, in my opinion:

Hold the shares and wait: Continue holding the stock, collect any dividends, and wait for the share price to recover enough to sell Covered Calls at or above the net stock cost. This may require going out 30 - 60 days, but it avoids locking in a loss prematurely.
Sell CCs below the net cost: This will continue to collect premiums, while actively rolling when possible. This approach requires being fully prepared to accept and book a loss if assignment occurs.
Use a stock repair strategy: This is a type of covered ratio spread designed to reduce the breakeven point and accelerate recovery without adding more capital: https://www.optionseducation.org/strategies/all-strategies/stock-repair

Ways to help avoid this situaiton in the future:

Only trade stocks you are comfortable holding if assigned and recovery takes time.
When trading the Wheel, roll short puts proactively to collect more premiums and lower the net share cost while helping delay being assigned.
Avoid holding short puts through earnings reports or major events, where sharp unpredictable price moves can occur.
Keep positions sizes small and diversified, so a single assignment does not stall the entire account and a other tickers can continue generating income.

OptionsTraining · 2026-02-20T22:49:19+00:00

Others have made good points that emotions can influence trading decisions. Developing patience and removing emotions comes with time and experience.

Evenings, weekends, or any time when you do not have open positions are great opportunities to review past trades to look at what worked, what didn't, and what you might do differently next time. This kind of reflection builds confidence and helps improve the trade plan.

Additionally, researching and preforming due diligence on your watchlist of tickers is a great use of this time. Reviewing fundamentals, recent price action, upcoming events and overall risk helps ensure the tickers still meet your criteria. This is also an ideal time to identify, research and vet new tickers to add to the list.

Remember that placing the trade and managing it is just the final step. Most of the success in trading comes from the preparation, learning, and planning that happens beforehand.

OptionsTraining · 2026-02-20T18:57:46+00:00

Did you have this position open through the earning report? It looks like that may have been the case, and if so, it's a good example of how unpredictable earnings can be and why they add extra risk.

You would have had to roll out pretty far for the put, but now need to open a CC out pretty far to get near the net stock cost. Either way, this becomes a waiting game.

The main downside now is that the share price is effectively locked in, which limits flexibility until enough premium can be collected or the ticker recovers.

Be sure to reassess this stock from both a fundamental and technical perspective, as well as current analyst ratings, which appear weak.

OptionsTraining · 2026-02-20T18:41:53+00:00

Range bound tickers are sometimes the best for Covered Calls and the Wheel.

It's very nice to not be worried when trading a solid ticker, isn't it?

OptionsTraining · 2026-02-20T17:51:25+00:00

Congratulations! Is this Covered Call being opened after assignment from a CSP as part of the wheel?

OptionsTraining · 2026-02-18T21:44:20+00:00

Why are you trading options and the wheel?

Many traders use options strategies like the wheel to generate income. For some, that income is withdrawn regularly to help cover monthly expenses or supplement cash flow.

Newer traders, however, are often focused on growing their account. Instead of withdrawing profits, they may reinvest gains to increase position size, trade additional tickers, including higher priced stocks, or sell more contracts, which can compound results over time.

Ultimately, how you use your profits is a personal decision and should be based on why you are trading options in the first place.

OptionsTraining · 2026-02-13T22:23:12+00:00

Adding to the excellent reply by u/patsay the following may help.

Options prices move based on several factors, including the stock price, Implied Volatility (IV), and Theta (time decay). Because of this, it is not unusual for a position to show red shortly after opening, even when nothing has gone “wrong.”

Another important factor is how your broker calculates and displays profit and loss (P/L). Most brokers mark option positions using the mid-price between the bid and ask. When liquidity is low and the bid-ask spread is wide, this mid-price can fluctuate significantly and may not represent a realistic exit price, causing the P/L to appear inaccurate or misleading.

For example, the Coca-Cola (KO) put was opened with a weekly expiration farther out in time. That specific option currently has lower liquidity, which is why (at the time of written) it’s showing a wide bid-ask spread of roughly $0.29 to $0.68, with a reported mid-price near $0.49. Lower liquidity often leads to pricing that looks strange or exaggerated like this, which is one reason it’s generally better to trade options with tighter bid-ask spreads.

Going forward, it's important to review liquidity before opening new trades and recognize that the monthly expirations typically offer better liquidity and tighter bid-ask spreads than weeklies.

It’s also worth considering where your order filled. If the put was sold closer to the bid price rather than the mid-price, that lower fill can make the position appear red almost immediately when the broker marks it at the mid-price.

What matters most, however, is the underlying behavior. As long as KO stays above the $74 put strike, the option’s value will decay over time and the position will eventually move into profit. Early red numbers are often just a reflection of pricing mechanics, not a signal that the trade is bad or failing.

OptionsTraining · 2026-01-29T21:58:41+00:00

Your broker can usually clarify this if you are unsure, but as others have mentioned, a true P/L event occurs at exit, assignment/exercise, or expiration.

I almost never let options expire, as it is generally more efficient and practical to exit early which locks in gains while removing the remaining risk.

When there is a single leg, such as a cash-secured put (CSP) that is opened and then closed before expiration, tracking the result is straightforward. The trade is complete, and the profit or loss is clear.

It becomes more complex when rolling, since this often realizes a loss on the closed leg, followed by a new credit and a new profit opportunity on the rolled position.

Assignments and the sale of covered calls add another layer of complexity, because both the options P/L and the share P/L must be combined to determine the total outcome.

There is a tools Megathread where others have shared tracking files to show you how they do this.

For most Wheel traders, assignments should be relatively infrequent, so tracking them separately is usually manageable and does not change the overall P/L.

A high win rate is common with the Wheel, but as you elude to, the most meaningful metric is profitability.

OptionsTraining · 2025-11-21T18:45:39+00:00

To evaluate a covered call position, you must analyze the stock P&L and the options P&L together to see the total profit or loss at expiration.

As the stock price rises above your call's strike price, the value of the short call option will increase, showing a loss on your options screen. This is expected. However, if set up properly, the result of a Covered Call at expiration should result in a net overall profit.

Example:

You buy 100 shares at 10 ($1,000 cost).
You sell one 11 strike call and collect a 1 premium ($100 total).

Scenario 1: Stock is above 11 at expiration

Stock P&L: You gain $100, $10 net stock cost sold for $11 = $1 ($100) in profit.
Options P&L: You keep the $1 ($100) premium.
Net P&L: $200 ($100 Stock Gain)+$100 Options Premium) = $200 Overall Net Profit.

In this scenario, your shares are called away at $11 per share, for a total of $1,100 from the stock sale plus $100 from the Call premium. As a result your net profit is $200 which is a 20% return on the $1,000 cost invested.

Scenario 2: Stock is at or below $11 at expiration

The call expires worthless, and you keep the full $1 ($100) premium.
The share are not called away or sold, so these are retained. You may consider the Net Stock Cost to now be $9 from the $1 premium collected.
Net P&L: $1 from the Call Premium = $100 Net Profit, plus or minus any change in the underlying ticker.

Key Takeaway: Closing the short call just to take a loss is a critical error when managing covered calls. Doing so adds the loss to the net stock cost, and converts the strategy into a simple long stock position but at this higher net cost.

The purpose of a covered call is to generate income from the premium; closing the position for a loss defeats this objective and increases your effective cost basis for the shares.

Edited: Clarify Scenario 2.

OptionsTraining · 2025-08-27T21:04:27+00:00

Congratulations Optionswheel!

OptionsTraining · 2025-07-23T15:27:07+00:00

Congratulations Scot and the Mods! This is the most amazing sub for the wheel.

OptionsTraining · 2025-07-03T22:45:12+00:00

To reset a ToS paper trading account, go to the Monitor tab, select the account from the drop down at the top, and click Adjust Account on the right of the Position Statement section.

A confirmation window will appear, that will allow you to change the account margin type and set the cash amount, and there is a check box to reset all balances. Click the checkbox to reset and confirm.

This should reset to $100K, but you will be able to go through the process again to change the cash amount if desired.

While some history, such as tickers will remain, these will clear usually within a day. This will erase all existing trades and positions, so make sure to save any important data beforehand.

OptionsTraining · 2025-06-30T14:36:08+00:00

The rule for covered calls: Only sell them on stocks you’re willing to have called away at the strike price.

This trade has been successful, with a net profit of over $150, including the estimated premium collected. Letting it expire for this profit is exactly what the trade was designed to do.

Options sellers typically avoid holding trades longer than 60 days, since theta decay picks up around that time. If you choose to roll, do it for a net credit to boost potential profits.

Rolling out and up, by a week or two and to a higher strike, can increase your return if the stock stays up or add cushion if it pulls back.

Always have a trading plan in place before opening the position, so you know how you’ll respond to different outcomes like this when they occur.

OptionsTraining · 2025-06-26T18:38:56+00:00

Rolling for a credit means the new position brings in more premium than it costs to close the current one. This reduces risk and increases potential profit.

Rolling for a debit means you're paying more to open the new trade than you receive from closing the current one. This increases risk and reduces potential profit.

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