How to Close a Covered Call
Closing a covered call means buying back the call you sold — your 100 shares stay put. This guide shows exactly how to close a covered call early or at expiration, what it costs, the tax impact, and when to roll instead of closing.
The short answer
To close a covered call, place a Buy to Close order on the call option you originally sold. That single order ends the trade — you do not sell your shares. You can do this any time the market is open, early or on expiration day. Your profit is the premium you collected minus the debit you pay to buy the call back, minus commissions.
Step-by-step: closing a covered call
- Step 1 — Find the position. In your broker app, open the short call. It shows a negative quantity (e.g. −1) because you used "Sell to Open" to write it.
- Step 2 — Choose Buy to Close. Select the call and pick the "Buy to Close" (BTC) action — the exact opposite of the order that opened it.
- Step 3 — Use a limit order. Set the limit at or near the mid-price between bid and ask. Skip market orders on options; wide spreads can fill badly.
- Step 4 — Check the cost. The debit you pay is your closing cost. Net P/L = premium collected − closing debit − commissions.
- Step 5 — Confirm shares are free. Once filled, the call is gone and your 100 shares are unencumbered, ready to sell another call or hold.
Can you close a covered call early?
Yes — and it's the norm, not the exception. There is no rule that forces you to hold a covered call until expiration. As long as the option is trading, you can buy to close at the current market price whenever you want.
Most active sellers close (or roll) when the call has captured roughly 50–80% of its maximum profit. At that point the remaining premium is small and isn't worth holding through assignment risk, a dividend date, or earnings. Buying back a cheap call locks in the bulk of the gain and frees you to redeploy the shares.
Buy to close vs buy to open
These two order types confuse a lot of new traders. The difference is whether you're entering or exiting a position:
- Buy to Open — you're buying an option to start a new long position (e.g. buying a call you expect to rise).
- Buy to Close — you're buying an option to end an existing short position (e.g. buying back a covered call you sold).
For a covered call you always exit with Buy to Close, because you originally Sold to Open the call. Using Buy to Open by mistake would create a brand-new long call instead of closing your short one.
How much does it cost to close a covered call?
The cost equals the call's current price (the buy-to-close debit) plus commission. Two examples:
- Profitable close. You sold the call for $2.00 ($200). The stock dropped and the call is now worth $0.40 ($40). Buying to close costs $40 + commission, locking in about $160 profit on the call leg.
- Defensive close. The stock rallied past your strike and the call is now $3.00 ($300). Closing costs $300 — a $100 loss on the call — but your 100 shares gained far more on the way up, so the overall covered call is usually still a winner up to the strike.
Close, let it expire, or roll?
- Let it expire worthless when the stock is well below the strike and the call is just a few cents — you keep 100% of the premium with no closing commission.
- Close early when you've captured most of the profit, want to dodge assignment, or need the shares back.
- Roll when you still want income on the same shares — close the current call and open a later one in a single order, usually for a net credit. See how to roll a covered call.
Taxes when you close early
In a taxable account, buying to close a covered call realizes the gain or loss in that tax year. Covered call premium is generally treated as a short-term capital gain regardless of holding period. Closing early fixes the realization date but doesn't change the tax character. In an IRA there's no immediate tax. This is general information, not tax advice — confirm specifics with a tax professional.
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Closing a Covered Call FAQ
Can you close a covered call early?
Yes. You can close a covered call any time the options market is open before expiration. You don't have to wait until expiration day. You close it by placing a 'buy to close' order on the short call, which buys back the exact contract you sold. Closing early is extremely common — most active covered call sellers close or roll well before expiration to lock in profit, reduce assignment risk, or free up the shares.
How do I close a covered call?
Place a 'Buy to Close' order on the call option you previously sold. In your broker app, open the position (it shows as a negative contract quantity), tap the call, and choose Buy to Close. Use a limit order near the mid-price. Once it fills, the call is gone and your 100 shares are unencumbered. You do not sell your shares to close a covered call — you only buy back the option leg.
What does buy to close mean for a covered call?
When you wrote (sold) the covered call you used a 'Sell to Open' order, which created a short option position. 'Buy to Close' is the mirror order that buys the same contract back and cancels the position out to zero. Buy to close is how you exit any short option. The difference between the credit you received (sell to open) and the debit you pay (buy to close) is your profit or loss on the call.
Can you close a covered call before expiration?
Yes — there's no rule forcing you to hold until expiration. As long as the underlying options are trading, you can buy to close at the current market price. Many traders close at 50–80% of max profit (when the call has lost most of its value) rather than squeezing out the last few dollars, because the remaining premium isn't worth the assignment and gap risk.
How much does it cost to close a covered call?
The cost is whatever the call is currently worth — the debit you pay to buy it back — plus your broker's per-contract commission (often $0–$0.65). If you sold the call for $2.00 ($200) and it's now worth $0.40 ($40), it costs $40 plus commission to close, locking in roughly $160 of profit. If the stock rallied and the call is now worth $3.00, closing costs $300 and you'd realize a $100 loss on the call leg (partly offset by gains on your shares).
Should I close a covered call early or let it expire?
Let it expire worthless when the stock is well below the strike and the call is nearly worthless (a few cents) — you keep the full premium with no closing commission. Close early when: (1) the call has already captured most of its profit (e.g. 80%+), (2) you want to avoid assignment as the stock approaches or exceeds the strike, (3) there's an upcoming dividend or earnings event, or (4) you want to free up the shares. Closing early caps both your remaining gain and your remaining risk.
What happens to my shares when I close a covered call?
Nothing — you keep all 100 shares. A covered call has two legs: long 100 shares and one short call. Closing the covered call means buying back only the short call. Your shares are not sold or affected. After closing you're left holding the stock outright, free to sell another call, hold, or sell the shares separately.
Is it better to close a covered call or roll it?
Closing exits the trade entirely. Rolling closes the current call and opens a new one (later expiration and/or different strike) in a single order, usually for a net credit. Roll when you still want covered call income on the same shares and the new strike/expiration makes sense. Just close when you want out of the position, expect the stock to move sharply, or want to redeploy the shares. See our guide on rolling covered calls for the mechanics.
Do I pay taxes when I close a covered call early?
Yes. Buying to close a short call is a taxable event in a taxable account — the gain or loss on the option is realized in the year you close. Covered call premiums are generally taxed as short-term capital gains regardless of how long you held them. Closing early doesn't change the tax character, but it does fix the realization date. In an IRA, there's no immediate tax. This is general information, not tax advice — confirm with a tax professional.
Can I close a covered call for a loss?
Yes, and sometimes you should. If the stock rallies above your strike, the call gains value and buying it back costs more than you collected — a loss on the option. But your shares gained more than the call lost (up to the strike), so the overall position is usually still profitable. Traders close calls for a loss to avoid assignment, protect a dividend, or reset to a higher strike via a roll.
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