🧠 Understanding the Covered Call

When you sell (write) a covered call, you:

  1. Own 100 shares of the stock (the “covered” part).
  2. Sell someone else the right—but not the obligation—to buy your shares at a specific strike price before expiration.

Until that option expires or is exercised, you are obligated to sell your shares at the strike price if the buyer exercises.

⚠️ What Happens If the Market Crashes

If the stock price plunges below your strike price:

  • The call option will lose value and likely expire worthless.
  • You keep your shares and the premium you received.
  • However, your shares lose value with the market, just like any other shareholder.

You are not locked in from selling your stock — but you must handle it carefully.

🧾 Your Choices During a Crash

1. Close Both Legs Manually

You can unwind the position before expiration:

  1. Buy back the call option (close the short call).
  2. Sell your stock.

This frees you completely — you’ve exited both the stock and the obligation.

  • You’ll pay the current market price to buy back the call (usually cheap after a crash).
  • Then you can sell your stock immediately at market.

âś… This is the cleanest way to sell your stock while a call is open.

2. Wait for Expiration

If the stock stays well below the strike:

  • The call expires worthless.
  • You can then sell your shares anytime afterward.
  • You keep 100% of the premium as income.

✅ This works if you’re not in a hurry to sell and think the stock may rebound.

3. Roll the Option Down or Out

If you want to manage losses or adjust your position:

  • Buy back the existing call.
  • Sell a new one with a lower strike or a later expiration date.

This generates more income but keeps you invested.

✅ Useful for gradual exit or “income averaging,” not emergency liquidation.

🚨 Important Warning

Never sell the stock without first closing the call — doing so would leave you naked short a call, which is very risky.

If the stock rebounds sharply, you could be forced to buy back shares at much higher prices to cover your short call.

âś… Summary Table

Market Action Option Value What You Can Do Risk
Stock crashes Call worth little Buy back call, sell stock Normal loss on shares
Stock stable Call decays Hold or roll Mild risk
Stock rallies Call gains value May be exercised Opportunity cost on upside