Question

Explain the advantages and disadvantages to a covered call writer of closing out the
position prior to expiration.

Answer 1

Advantages of covered call writer of closing the positions prior to maturity are as follows-

A. It will help in realising profits and closing out the positions early.

B. It also helps in proper risk management by holding the underlying shares and selling out of the money call option and gaining by it

C.it will also eliminate the risk of loss from any volatility in the stock in the future.

Disadvantages of covered call writer of closing the position prior to maturity are as follows-

A. It can lead to closing out on the profits and booking the profits early.

B. It can also lead to cutting of the position before the potential of gaining more profits.

C. It could have also led to gaining on the time value of the option for eating the whole premium.