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Writing covered in-the-money call: can I buy back the calls and sell the stock without loss at a lower price?

• I haven't seen many examples of options online which actually include commissions. What I'm wondering is if I purchase an In The Money call is there a price between the market price at call purchase (not sure what this is usually called) and the strike price at which I can buy back the calls and sell the stock without suffering a loss? I know that if I wait until the stock price (spot price after option entered?) hits the strike price then it will cost me a new premium (lower than what I originally paid though) to buy back the calls plus the transaction costs to get out of the contract. But what if the market price is a bit higher? Would the cost to buy back the premium be higher such that I would still incur a loss or is there typically a "sweet spot" at which point the option can be closed and the underlying security sold without losing money? I know there are a lot of different options strategies out there, I'm trying to understand this one well before learning others. I know most of my questions have been answered by a few individuals so thank you both for taking the time to answer them. The pieces of the puzzle are starting to come together- I think at least! :)

• Answer:

  <<<Writing covered in-the-money call: can I buy back the calls and sell the stock without loss at a lower price?>>> Sometimes, but usually not. <<<What I'm wondering is if I purchase an In The Money call is there a price between the market price at call purchase (not sure what this is usually called) and the strike price at which I can buy back the calls and sell the stock without suffering a loss?>>> I assume when you say "if I purchase an In The Money call" you mean "if I purchase the stock and write an in the money call." (When you write a call you sell it instead of purchasing it.) You need to understand that the price of the option depends upon more than the strike price and the stock price. It also depends upon the amount of time until expiration and the implied volatility. The change in the price of a call option relative to the change in the price of the stock is called "delta" in the options world. Delta for a call option is always between 0.00 and 1.00. For an ITM option delta is usually between 0.50 and 1.00. For example, if the delta of an option is 0.75 and the price of the underlying stock drops from 100 to 96 it changed by -$4.00 per share and you would expect the price of the call option to change by approximately -$4.00 x 0.75 = -$3.00. So, if you were long the stock and short the call option you would have an unrealized loss of $4.00 per share on the stock and an unrealized gain of $3.00 per share on the option, for a net unrealized loss of $1.00 per share. It is important to remember that delta changes as other conditions change, so do not assume delta will remain constant. Change in the price of the option due to time passing is known as theta. Options are a wasting asset, meaning the decrease in value due to the passage of time. So, if you sold the covered call two months before expiration and the stock dropped two days before expiration it is possible the option would have lost more value due to theta than it gained due to delta. If the value of the option had decreased more than the value of the stock decrease, you could close both the stock and option position for a net profit. Change in the price of the option due to a change in the implied volatility is known as vega. If implied volatility increases the value of the option will increase, which is bad for you since you are short the option. If implied volatility decreases the value of the option will decrease. <<<I know that if I wait until the stock price (spot price after option entered?) hits the strike price then it will cost me a new premium (lower than what I originally paid though) to buy back the calls plus the transaction costs to get out of the contract.>>> That is usually true, but if there was a big enough increase in implied volatility you might actually find the price of the option is higher even though the price of the stock went down. <<<Would the cost to buy back the premium be higher such that I would still incur a loss or is there typically a "sweet spot" at which point the option can be closed and the underlying security sold without losing money?>>> Usually there is not such a sweet spot. ----- There are two more points I want to make. Before learning any option strategy I believe it is important to learn how option pricing works. You asked a good question that (I think) shows you are trying to learn that, but I think you will have much more success learning it by taking classes/tutorials and/or reading books. I will recommend http://www.cboe.com/LearnCenter/default.aspx and/or http://www.optionseducation.org/ Second, you mentioned concern about commissions. While commissions are a consideration, with current discount brokerages you will probably find that bid-ask spreads will cost you more than commissions. For example, if an option has a bid of $9.00 and an ask of $10.00 you can lose 10% without the price of the option ever changing.