Covered call writing seems like a perfect strategy. A target price to sell the underlying shares as well as enhanced cash flow and/or risk reduction benefits from the premium received. Even the worst case scenario - the underlying shares rise dramatically – produces the maximum profit from a covered call strategy.

Having said that, covered call writing can cause you to lose the best performing stocks in your portfolio. Leaving you with a basket of underperformers that were not called away.

A way around this is to recognize that option strategies are not static. They can be altered prior to expiration.

Normally we think about follow-up action in terms of repair strategies. Like occurs when say, buying a call option just before the underlying shares declines. Depending on your view of the underlying shares, you could take corrective action like selling calls at a lower strike. Effectively turning the initial long call position into a bear call spread.

But it’s not a really a repair strategy when a covered call position is profitable. It’s more of a corrective follow-up strategy designed to ratchet up the potential return.

For example, suppose you buy XYZ at $25 per share and sell a six-month $27.50 covered call at $2 per share premium. The out-of-pocket cost for XYZ is $23 per share ($25 purchase price less $2 premium = $23 per share). The maximum return occurs at $27.50 per share six months forward.

But suppose XYZ rises to $35 per share over the ensuing three months. You are now short a three-month in-the-money call with little time value, and a high probability of being exercised in three months. The problem is that you have tied up your capital in a position that is already close to its maximum profit potential.

Certainly you could buy back the short calls and then sell your shares. At which point you free up capital for your next trade. Or you could engage in some other type of corrective strategy.

Keeping with the previous example, assuming you are bullish on the prospects for XYZ, you could simply buy back the short calls and hold the underlying XYZ shares. But with the underlying shares trading at $35, buying back a three month $27.50 call would cost about $8 per share (premium represents $7.50 in intrinsic value and 50 cents of time value). The problem with this approach is the potential for whipsaw. Where a stock falls back after a sharp run up.

Another corrective approach is to roll up the covered call. In other words, buy back the short $27.50 call at $8 per share, and write an at-the-money $35 strike call at say, $2 per share. With this approach, you have brought in two premiums ($2.50 from the initial sale + $2 from the subsequent sale) and paid out one (the $8 premium to buy back the initial short call). The net effect, is a $7.50 increase in the potential sale price of the underlying shares, less a $3.50 cost to roll the short option position.

You could also look at corrective action using puts. Leave the initial covered call position intact, and open a bull put spread on the underlying shares.

A bull put spread involves the simultaneous sale of a put with a higher strike price against the purchase of a put with a lower strike price. For example, with XYZ, you could write a three month $35 put at say, $1.75 and buy a three month $27.50 put at 25 cents. The bull put spread generates a net credit of $1.50 per share.

The idea behind the bull put spread, is to effectively add an equivalent covered call position on top of the current covered call write. All without committing additional dollars to the trade.

The short put is equivalent in terms of risk and return to a covered call write. The use of a spread simply limits the risk and thus, the margin required to establish the position. The margin required is limited to the difference between the strike prices less the net credit.