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Three Reasons to Roll a Covered Call

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by Gavin in Blog, covered calls
January 18, 2025 0 comments
rolling a covered call

Rolling a covered call is a skill an option investor should learn.

While learning, you may find that it is not as straightforward as it initially may sound.

Rolling a covered call is simply closing the existing covered call and opening a new one.

This definition may be simple, but the execution as to when and how to roll is not simple.

Contents

Generally speaking, there are three main reasons for rolling a covered call.

  1. There is very little premium left in the covered call
  2. The call is close to expiration
  3. Underlying stock has had a big drop

Example: Little Premium left

On May 22, 2024, an investor owned 100 shares in the company Cisco (CSCO), which was currently trading at $47.32.

He sells the $48-strike covered call expiring on June 21, which is 30 days away.

He receives a credit for $70 for the sale.

rolling a covered call

On June 7, we saw that there was only $10 worth of premium left in the call option.

That means we can buy back the call option for $10 when we had sold it for $70, pocketing $60 profit on the call option.

Making money on the call option does not mean we made money on the covered call trade.

The low premium could result from either the option getting close to expiration, the price of the underlying dropping, or both.

In this case, the call option still had two weeks till expiration.

The CSCO price dropped to $46.13, and the total net loss from stock and options was $57.

rolling a covered call

Because of the low premium left, the investor rolls the call option down and to a further dated expiration.

Date: June 7

Price: $46.13

Buy to close June 21 CSCO $48 call @ $0.10
Sell to open July 5th CSCO $47 call @ $0.49

Net credit: $39

Afterwards:

rolling a covered call

The breakeven price improved to $46.22, where it had been $46.64 before.

Example: Close To Expiration

On August 5, 2024, an investor owned 100 shares in American Express (AXP), which was currently trading at $228.

He sells the $230-strike covered call expiring on September 6, 32 days away.

He receives a credit of $880 for the sale.

rolling a covered call

On September 3, with three days till the expiration of the options, there is not much more profit that can be made in the trade:

rolling a covered call

Unlike the previous example, there is still a lot of premium left in the call option.

In fact, the call option is trading at $25.27.

It was trading at $8.80 when it was first started.

The call option lost money because the price of American Express at $255 exceeded the strike price of $230.

We say that the call option has gone “in-the-money”.

Nevertheless, the long stock position consisting of 100 shares makes the overall trade profitable at over $1000 in gains.

The investor has three choices:

1. Hold till expiration and let the stock be called away. With the magic of modeling software using historical data, we know that AXP is at $244 at expiration, and it will be called away (sold) at a $230 strike price. Since the stock price started at $228, that is a gain of $200. Plus, the credit received was $880 from the call option sale. The net gain in the trade is $1080.

2. Buy the call option back, sell the stock, and exit the trade entirely. Pay $2527 to buy the option back. And sell 100 shares of AXP for $255 per share. Calculating value of… $25500-$2527+$880 = $23,853.  Original value of $22,800. Net gain of $1053.

3. Or continue to keep AXP stock and roll the call option up and out.

Since we are on the topic of rolling covered calls, the third choice is what we choose.

Pay $2527 to buy the option back.

Sell the 260-strike call option for a sale price of $345, with the option expiring September 20, giving us 17 more days till expiration.

This means we will pay $2182 to perform the roll.

But that gives us additional profit potential, as seen in the new expiration graph:

rolling a covered call

Example: The Underlying Stock Has A Big Drop

On September 26, 2024, an investor held 100 shares of Merck (MRK), which was currently trading at $112.97.

He sells the $116-strike covered call expiring on October 18, which is 22 days out.

He receives a credit of $84 for that sale.

The risk graph looks like this, with a max potential profit of about $400:

rolling a covered call

On October 8, the stock dropped to $108, and the market price of the call option dropped to $20.

rolling a covered call

The relevant Greeks are:

Delta: 96
Theta: 2.3

The breakeven price for Merck is $112.13.

The call option sold for $84 can now be purchased back at $20, about a 75% loss of the original premium in the option.

A net gain of $64 for the option.

Therefore, he decides to buy to close the call option and sell another call option with a strike price of $113 for a further expiration of November 1.

That option could be sold for $114.

So, the net credit for the roll is $94.

The next risk graph shows the breakeven price to be better at $111.23

rolling a covered call

This means that the trade will be profitable if MRK is at $111.23 or higher at expiration.

The Greeks have improved:

Delta: 77
Theta: 5.37

The delta decreased, and the theta increased.

How Was This Breakeven Price Calculated?

We got an initial credit of $84 from the option and another credit of $94 for rolling the option.

Net $178.

This means the stock price can drop $1.78 from where it started, and no money would be lost.

$112.97 – $1.78 = $111.19

Conclusion

There is no fixed rule for when and how to roll covered calls; only guidelines and personal preferences exist.

Some traders may also consider support and resistance, technical analysis, fundamental analysis, and their desire to hold or relinquish their shares in a company.

That is why you have to come up with your own rules for rolling covered calls.

The three examples should give you scenarios for which you need to account for when working with covered calls.

We hope you enjoyed this article on three reasons to roll a covered call.

If you have any questions, please send an email or leave a comment below.

Trade safe!

Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are not familiar with exchange traded options. Any readers interested in this strategy should do their own research and seek advice from a licensed financial adviser.

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