Therefore, this article will concentrate on those situations where the stock price has risen above the strike price of the written call. The ideal environment for a covered writer is a slowly advancing market. And ideally, the underlying stock would rally just up to the area of the call strike price. That would produce maximum profit on the original position and excellent rewriting prospects. The problems start to develop when the stock makes a big move one way or the other.
Serious problems develop when the stock has a big drop.
While rolling down the call is a consideration, the more reasonable move will probably be to get out of the stock. Our purpose here is to discuss the problems that develop when the stock underlying a covered call has a big rally. Many others, though, will feel that they've missed out on too much extra profit potential and they'll want to roll the calls up. This is where more serious problems could develop. The advantage that covered writing offers is time premium income.