How to Recover When Your Covered Call Stock Gets Stuck
Covered Calls and the “Happy Problem” of Missing Out
A common worry with covered call strategies is: “What if the stock suddenly surges and I miss out on huge gains?” Honestly, that’s a happy problem to have.
The real headache isn’t missing some upside—it’s when you’ve sold a few covered calls, pocketed a couple of percentage points in premium… and then the stock itself drops even further, wiping out your progress. In investing, avoiding big losses is far more important than fretting about how much you “could have” made.
A Rescue Technique: Ratio Credit Spread
Today I want to share a repair strategy for situations like this: the Ratio Credit Spread. Think of it as selling a covered call but adding a bullish call spread to help recover faster. It’s particularly useful when your stock has fallen 10–20%.
Let’s use AMD as an example:
Current price: $148
Your cost basis: $173 purchase price, minus $3 collected from a previous covered call = $170
If you stick to a standard covered call, you might sell the $160 strike expiring 11/29 (Delta ≈ 0.2) for about $1.50 in premium. But there’s a 20% chance AMD closes above $160 in two weeks, putting your call in the money (ITM). You’d have to roll it forward, inching your cost basis lower bit by bit.
If you instead sell a $170 strike (your cost basis), the premium drops to just $0.55—not very helpful.
Executing the Ratio Credit Spread
Here’s where the Ratio Credit Spread shines:
Buy one $155 call for $2.65.
Sell two $160 calls for a total of $3.00.
Net credit: $0.35 (slightly less than the $1.50 from a plain covered call, but with upside potential).
Why is this better?
If AMD closes between $155 and $160 (say $159) in two weeks:
Your $155 long call is worth $4.00.
Both $160 shorts expire worthless.
You’ve reduced your cost basis by an additional $4 per share—far faster than a standard CC.
As long as AMD closes above $156.15, this strategy outperforms a simple $160 CC.
If AMD closes above $160, you can roll one of the $160 shorts just like a normal CC, while your remaining 155/160 spread locks in a $5 profit.
The trade-off? If AMD finishes below $155, you’re worse off by about $1.15 compared to a plain CC. That’s the cost of giving yourself more upside repair potential—you decide whether it’s worth it.
Alternative Variant
Another option:
Buy one $150 call
Sell two $155 calls
Collect a net credit of $0.80
This works if you believe AMD is less likely to break above $160 but could reasonably climb to $155 within two weeks.
Why This Matters
Executed well (and with a little luck), two or three of these trades can recover a $20+ per share paper loss. It’s not magic—there’s no free lunch—but for disciplined investors willing to learn, the Ratio Credit Spread can be a powerful repair tool when a stock pullback threatens to derail your covered call strategy.
