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Closing a covered call early: the 50% rule, explained

You close a covered call early by buying it back with a "buy to close" order. Many sellers do this once the call has lost about half its value, because the premium left isn't worth the weeks of risk left. Here's the rule and the arithmetic.

Options guide · 7-minute read · Updated 2026-10-26

How you close a covered call early

You sold the call to open. To close it, you buy the same call back. The order is called Buy to close. Pick the same strike and expiry, choose "buy to close", set a limit price, send it.

Once it fills, the call is gone. You keep whatever is left of the premium after paying the buy-back price. Your 100 shares stay with you, uncapped again.

That's it. The rest of this page is about when it makes sense.

What the 50% rule says

The 50% rule: when the call is worth about half what you sold it for, buy it back.

Sold for $1.00, now $0.50? Close it. You've kept $50 of the $100, and you're out of the trade with weeks to spare.

The reason is the shape of time decay. The first half of the premium usually melts faster than the second half per unit of risk you carry, because the risk of a sudden move doesn't shrink the way the premium does. Theta is on your side; Gamma risk isn't. Our theta decay guide shows the curve.

So the question becomes: is the last $50 worth three more weeks of being capped, with a dividend or a news item in the window? Often it isn't. In the wheel strategy, closing at half and selling a fresh call is a common rhythm.

A worked example of closing at half (an illustration, not a trade idea)

You own 100 shares of a made-up stock, XYZ, at $50. You sell a 35-day $55 call for $1.00, collecting $100.

Twelve days later, XYZ is at $49 and the call is bid $0.45, ask $0.55. You buy it back at $0.50.

You kept half the premium in a third of the time. Now the real question: what did you give up? Here's what the next 23 days would have done, compared with holding to expiry:

Look at the first row. If the stock falls, you're $50 worse for having closed early. The call you paid to remove would have expired worthless anyway. Closing early is not free; it costs you the second half of the premium in every outcome where the stock stays below the strike.

What you bought with that $50 is the last row: no cap. And the freedom to sell a new call sooner.

When closing early makes sense

• The call is at or under half, with two weeks or more to go. The rule's home case.
• An earnings date or ex-dividend date is coming inside the window and you'd rather not be capped through it.
• The stock has dropped and the call is worth pennies. Buying back a $0.05 call for $5 frees you to sell a new one at a better strike.
• You've changed your mind about the shares. If you want to sell them, buy the call back first, then sell the stock. Selling the shares while short the call leaves you naked.

When it doesn't

• The call has risen in price. If XYZ ran to $58, the $55 call might cost $3.50 to close. That's $350 out for a call that paid $100. That's not the 50% rule; that's chasing. See covered call when the stock goes up.
• Only a few days are left. The last days melt fastest. If the call is $0.10 with three days to go, the $10 you'd save isn't worth the commission or the attention.
• You'd just sell the same call again. Closing at $0.50 and reselling the same strike and date for $0.50 does nothing but pay the spread twice.

How to set the order

1. Open your position and choose "close" or "buy to close".
2. Set a limit price around the mid between bid and ask. Never use a market order on an option.
3. If it doesn't fill in a few minutes, nudge the price a few cents toward the ask.
4. Many brokers let you set this order the day you sell the call: a standing buy-to-close at half the premium, good till cancelled. Then the rule runs itself.

Write the plan into your exit rules so the decision is made before the emotion arrives.

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