The strategy 

• is often employed by holders of long term equities who are looking to milk some extra income out of certain stocks in their portfolio. 
• Other times,  traders will simply select a single  equity about which they have formed a bullish bias and undertake a covered call campaign around that stock.

Like every trade, there is an upside and a downside to the covered call.  If the trader is  “too” wrong and the stock  sells off substantially, the trade will be a loser–at least in the short term–because the loss on the shares will outstrip the gain on the short call.  If the trader is “too” right, the covered call will limit the trader’s  upside to the appreciation that the stock will enjoy up to the strike price of the short call.  The trade will be a winner, but not as big a winner as it would have been to have simply been long the stock or long a deep in the money call (a “synethetic” long  stock position).  However, if the trader is a little wrong or a little right, the covered call strategy will easily outperform a simple long position in the stock and can turn losing share holdings  into winning trades or flat boring equity positions  into outstanding  winning trades.

In this case, Lee actually commenced his campaign cleverly by selling a naked October ’10 $30   put on GMCR, picking up $138 of option premium which he pocketed when GMCR was trading at $34 last September.  GMCR  then  fell below $30 and he was assigned 100 shares of GMCR    upon the expiration of his put.  So Lee was off to a good start,  picking  up $138 of income on a stock that he was willing to own at $30 anyway.

Over the next three months, Lee cleverly milked his $3000 investment in GMCR stock selling slightly out-of-the money  calls and puts around his core GMCR long stock position then  buying them back as the stock fluctuated in price, buying back   the calls and puts  when  they shrunk in value to a fraction of their original sale price.

The day before GMCR’s  monster one day $18 point rally last week, here was Lee’s position:   in addition to holding  the GMCR  shares as they appreciated 45% above his original purchase price (the $30 per share that he shelled out when he was assigned the shares last October)   Lee milked another 10%  from his shares by skillfully selling calls and puts around his core long position.

The day after the monster up move, Lee’s “campaign” was up 58% in six months–a VERY successful covered call campaign.

It is true that if Lee had  simply purchased the GMCR shares at $30, his appreciation at the end of last week would have been closer to 100%.  However, had the GMCR shares appreciated more gradually, the covered call approach  would have  almost certainly continued to outperform a buy and hold shares strategy handily. Again, if the trader is “too” right, the covered call strategy will be successful, but may or may not be as successful as buying and holding the shares.

So first off, I’d argue that  there is nothing  to”repair”. This trade is a tremendous success.  Lee just has to make a decision as to where he wants to go from here with this campaign. If Lee has achieved his planned objective on the trade or believes the stock is due for a correction, he can simply cover the call and sell the shares simultaneously locking in his excellent gain.

On the other hand, Lee  may think that  the stock has further upside.  If so, he can buy back the call, take the loss on the call (while still holding shares that are up almost 100%)  and sell an out-of-the money call such as the April 65 or the June 65 or even 70. In this case, even if the stock sells off a bit, Lee could be in a better position than he is today because of  his receipt of the  new  call premium he collected–it would all depend upon how steep the sell off is,  and   its timing.   On the other hand, if Lee is stays in the trade and his further  bullish bias is correct,  the P and L of  his “campaign” will continue to improve.

Lee, great job on your covered call campaign!  You don’t need a “repair” at all–you just need to decide whether your capital is better employed in a different trade with more potential upside and less potential downside, or whether you think your best risk/reward trade-off remains in remaining in the GMCR campaign.