I am usually a basic buy and hold investor, and don’t do day trading.
A few months ago I bought a stock at $5 per share and it just shot up to $7.5 after an earnings report. I considered selling some shares to take 50% profit and put it into other stocks, commonly known as rebalancing. However, I saw that I could also sell covered calls expiring in 8 months at the nearest strike price for around $2.5, bringing my cost basis from $5 down to $2.5.
The scenarios would be:
- If the stock stays in the range $7.5-$10 (likely), I would lock in the total profit of 100%, which I am more than happy to do.
- If the stock goes to the moon (unlikely), I would still get the same 100% profit, which is not bad.
- In the event the stock does go down, I would be happy to keep my shares, and possibly buy more.
Do you think this is a good idea? Whenever I search for covered call strategy, people usually discuss it as speculative play for day traders, not for long-term investors like me.
Selling covered calls to rebalance portfolio
byu/valorhippo inoptions
Posted by valorhippo
1 Comment
You’re thinking smart. You’re working on exponential gains. Once you hit that sweet spot and recover most of your cost basis any trade you make will be profitable. I’m trying this with RUM right now. I’m negative $200 market value and I have sold 140$ of calls and puts premium. Once I make up the $60 negative difference then I can get risky with the options trade and make more money. In my opinion, I think you are on the right track.