So I have had this question a lot in the community, and here is the situation. A lot of you started selling calls when we were in a sideways trading range. That made sense at the time. Selling calls or selling strangles in a range has been very lucrative. But now the stock has broken out, and you are short a call that is starting to move against you.
Let me use Marvel as the example. We had been trading sideways since October. Selling calls in that range was easy money. But now we have broken out. This is a strong stock. It is a racehorse. The optimized trend is extraordinarily strong, and the mean reversion is almost neutral.
So let me walk you through the chess moves you have available if you sold a May 8th 140 call and the stock is running away from you.
The Rule
Here is my rule. If I sell a call, let me say I sell the May 8th 140 call for a $10 credit. When the stock hits $150, which is my break even (the strike plus the credit), I have a decision to make. Do I want to get out and kill a small monster now? Or do I want to manage it?
This is one of the most important concepts in selling calls. You have to think about it before it happens, not after.
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