How To Roll A Covered Call

Trading Covered Calls

I have a situation with my LVS trade.

I sold some covered calls thinking that the stock would stay in its range and not move higher than my sold strike. But now it has. So I have a decision to make: What do I do with my covered calls?

So I made a video describing 4 different things a trader could do and what to think about when they are considering Rolling A Call.

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  1. t swaim on February 8, 2012 at 4:32 pm

    very good – informative.

  2. Jim Loewen on February 8, 2012 at 5:10 pm

    You should fix the video. #2 is wrong, no? And I think it’s important to fix, because I think buying back the call and then immediately selling the stock should NEVER pay more than letting the call expire (option #1) and selling it that way. Right?

    • Genius on February 9, 2012 at 11:04 am

      If there is still time decay left than that should be the case. Although we can never say never.
      The math was not “wrong” it was just that I shouldnt have compared Choice 1 to Choice 2 the way it was written.
      The credit for the call was the difference.

  3. gary on February 8, 2012 at 6:24 pm

    I would not buy additional on pullback to 49-50 since another resistance level is at 54,and more importantly the broader market at major supply for a week. I would buy back the call back and put a stop on LVS at a decent profit and wait for the market to show us direction and then look at these strategies to fold into with LVS.

  4. Yadao Patil on February 8, 2012 at 6:29 pm

    Excellent presentation. I enjoyed. Thanks

  5. Dennis on February 8, 2012 at 8:39 pm

    I’ve watched the video on the covered call senario. I think the math on the option #2 was correct. On option #4 it seems that instead of a $128 debit you have forgotten about the original credit you had of $98 when you first sold the call. This would lower the debit to about $30. Also I was wondering if you’d ever heard of the “stock replacement strategy” that a guy named Ron Ianieri talks about. Basically, you find a stock you like and instead of buying the stock you buy a 6 to 9 month call with a delta of 80-85, then sell a current month OTM call. The theory being that as the stock appreciates, the long call goes up almost in lock step and even if you get exercised on the short call you are still ahead. If it expires out of the money you write another call for the next month and so on. And if you think it is going the other way, buy a 3 to 4 month put w/ a 30 delta. I paper traded this once (without the put)without sucess and can’t remember what happened or even which stock it was. I guess I should keep records on my paper trading as well. I sounds intriging to me. I’m curious what you think. Thanks for the covered call info. I’ve had to make this decision several times usually opting to keep the stock. Now I have a few other options to think about.

  6. Lloyd on February 8, 2012 at 9:44 pm

    Choice 5: Roll The Call To A Higher Strike Price In A More Distant Month For A Credit.

    It is usually impossible to roll-out only 1 Month to a $5.00 higher strike price for a credit (cash in).
    However, it is often possible to roll-out 2 or 3 or 6 months to a $5.00 higher strike price with a Credit Spread.
    Buy Back the front month In-the-money 50.0 Call and sell a 3 month out 55.00 Call for $1.00 with a Credit Spread Order.

    Then you will keep the Stock, raise the Call strike price from 50.0 to 55.0 and take in another 1.00 cash net.
    You will need to wait longer, but you will be paid for waiting and you will make 5.00 more on the stock if called out. Next time, you can roll-out from 55.0 Strike price to a 60.0 Strike price if the stock is still trending up.

    If the stock stops moving up and stays below 55.0 at expiration, you will make all of the option premium sold previously and still keep your stock.

    This strategy will work if the stock is not moving up very fast and if it has a large volatility.
    It will not work for low volatility stocks with small time value premiums unless you go out 12 months or more.

  7. Jay Marx on February 9, 2012 at 12:09 am

    Glad I ran across this! Gave me some confidence I’m at least half on-track! I had just done(under the gun) an out-and-up roll to a 28 against AGNC to (hopefully) retain the upcoming div. after price jump (29+)AND ex-div date move (3/21 in ’11, NOW 3/7/12) from AFTER 3/17 call expiration to BEFORE. I rolled ‘for free’ from Mar 28s to Jun 29s, but still unsure about getting called on ex-div, even with longer expiry. Torn between last minute call buy back for keeping div., or post div. stock re-entry to catch post- div. price drop. Any thoughts?

    • Genius on February 9, 2012 at 11:08 am

      Depends on the dividend yield, what you got for the call, and your tax consequences.

  8. Changis on February 9, 2012 at 12:26 am

    Thanks for a great explanation of rolling a covered call. Really appreciate the education.

  9. Jeff on February 9, 2012 at 10:53 am

    Perfect. I am in this exact situation this month as well and is very helpful.

  10. gary on February 9, 2012 at 11:48 am

    We just need to watch the broader market which is trying to break out but showing resistance at current supply levels, if it cannot and then pulls back it will bring our stocks that we have sold calls on down with it since 70% or so of a stocks movement is ultimately afftected by the broader market, any new buy writes or new calls written against stock make sure the stock is at least within its own demand price level and correlates within its ETF also at or near demand level for higher probability of success. Just a note of caution with markets at this level,if it breaks out great and happy calls to all.

  11. Anthony on February 9, 2012 at 2:59 pm

    Get into the habit of selling higher strike price, may be 3 to 5 points above the current stock price otm cc for 3 to 4 months, the premium should be @ least 2% per month base on ur cost basis. If u look for these 3 to 4 months cc, they are there, u just have to look.
    It cuts down ur commission cost greatly, u just have to do it 3 to 4 times a yr on ur favorite stocks..

    This is more of choice 5 as noted above by Lloyd 2/8/12 @ 9:44pm.

    LONGER MONTHS AND HIGHER SP. Most of the time u come out ahead. You get dividend, credit from sold call, and if called away, it is at a higher price. It gives ur stocks lot of breathing space and don’t have to worry every month with this sort of mind game.

  12. Tom Dahlby on February 9, 2012 at 3:22 pm

    your number 2 options shows how it can be tricky to compare profit on 2 different situations. I think you would have made more with option 1. I think you need to compute your total cash in hand after each possible transaction.

  13. Jim Bailey on February 9, 2012 at 6:10 pm

    Any advice on Apple May $500’s? I have 9 contracts which will probably be called. I would like to keep the stock, but “how high can this thing go?” Is it time to take an 80 point gain and move on or buy back these calls?

    • Genius on February 9, 2012 at 8:37 pm

      The scaredy cat in me says to take the money.
      You can alsways use some of the profits to buy come calls incase there is more upside.

  14. Brian on February 16, 2012 at 2:43 pm

    Alan, I’ve learned so much from you and I’m grateful for your breadth of option knowledge and experience.

    In this case, I think Option 2 analysis is incorrect.

    On a per share basis…

    If your stock basis is $43, you sold the 50c’s for $0.98, and it gets called away, then your profit is $7 + $0.98 = $7.98. So far, so good.

    If you buy back the call for $2.15 and sell the stock at $51.70, then your profit is $8.70 + $0.98 – $2.15 = $7.53.

    In theory, Option 2 can never be better than Option 1 because there will be time value left in the 50c all the way to expiration. So in this case, you’d be paying $2.15 to pick up an extra $1.70 in stock value. Even if you bought back the 50c with no time value whatsoever (only intrinsic value remaining), then you’d be paying $1.70 so you could be free to sell the stock for $1.70 more. Deduct the extra commission to buy back the 50c and that says that Option 2 should never be better than Option 1.

    Check the thinking on that?

    Thanks for making me scratch my head and put pencil to paper. I learned something. Please keep posting these videos.

    • Genius on February 17, 2012 at 12:53 pm

      Brian, you are right. And that is why I paused during the video when I noticed it was incorrect.
      The math is actually right but comparing option 1 to option 2 was were the error was because the price of the call should have been factored in.

      Thank you for your explanation.

  15. Rowena Lim on April 30, 2013 at 10:22 pm

    I agree, time decay is one important factor to consider on #2.

  16. Scott on July 23, 2013 at 10:11 pm

    The only problem with not just taking the money in the first place is as follows: If you roll the trade, many times you don’t end up with excess premium. So if you buy back the call for 2.15, you have to sell it for more than 2.15 to make money. And since you have extended the time that you have held the call to two months (assuming the original call was a one month call) you have effectively cut your return in half. Even if you make a little bit of money, rolling is dilutive. You sell the first month for 3%, and then then roll it and get a bit more, so your return is 3.5%, but it is for 2 months, not one.

    And if you roll up, you have turned a supposed non directional trade into a directional trade, which defeats the purpose of the covered call hedge in the first place. Last of all, the frustrating thing about covered calls, and I have traded them for a number of years, is that you get limited returns on the winners. But if the stock dumps, you are unprotected if the stock goes down too much. You may buy at 50 and get a $1 premium. But if the stock goes to $45, you are $4 under water and the stock may stay down for years.

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