MM35 - Closing out a Short Call Early

I want to go over something I am hearing a lot right now in the community. “I sold a covered call and I am frozen”. I do not know what to do. I do not know what my next steps are. When do I buy it back? How do I know if it is time to buy it back?

This is a really important lesson because anytime I sell a call, especially against a portfolio or against any stock where I would like to avoid getting called away, I always know what my Plan B is. I can always say if X happens, I know what I am going to do for Y. If A happens, here is what B is going to look like. I teach this decision framework in Course 202 and today I want to walk you through a real example on Nvidia.

The thing with Nvidia is it traded in a range for a very long time. Resistance at $200, support at $170. Back and forth for nine months. Finally we got right back to resistance. If you sold a call here, was it a bad trade? Not at all. You had a confluence sell signal coupled with + 2.5 mean reversion. You had every reason to think we would mean revert. We were back at resistance at $200.

If you went out and sold a call 40 days from expiration, you would be doing nothing wrong (Earnings are May 20th), but this was the question asked of me so I’m using this example. Now  it broke out. So let me show you how I would unwind this trade.