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Evaluating Returns When Rolling Out And Up

04/06/2015 8:00 am EST


Alan Ellman

President, The Blue Collar Investor Corp.

Alan Ellman, of, reviews a successful option trade that was recently executed by one of his subscribers in order to impress on the importance of having accurate and easily-comprehendible covered call writing and put-selling calculations.

Covered call writing and put-selling calculations must be accurate and preferably understood by option sellers. I created the Ellman Calculators to facilitate the authentic computations we depend on. In this article, I will review a successful trade executed by one of our members, David L, who used UTHR from our Premium Running list as the underlying security.

Initial Trade for the March Contract

  • Buy UTHR @ $155.90
  • Sell March $150 in-the-money call for $9.25
  • Intrinsic value = $5.90
  • Time value (Dave’s initial profit) = $3.35/share
  • ROO = $3.35/$150 = 2.2%
  • Downside protection of ROO = 3.8%

Initial returns for UTHR
Click to Enlarge

This represented an excellent conservative position to take on one of our outstanding performers.

Trade Status One Week Prior to Expiration

  • Share price = $163.22
  • Cost to close = $15.50
  • Considering rolling out and up
  • April $160 call generates $9.50

Using the What Now tab of the Ellman Calculator to calculate rolling out and up one week prior to expiration:

Rolling out and up with UTHR
Click to Enlarge

The computations show a 5-week return of 2.57% with 2% downside protection of that profit (not breakeven).

Return if We Opened the Position Saturday, March 28

David astutely pointed out that if the position were entered 1-week prior to expiration that the initial return would be 3.9% as shown in the screenshot below:

UTHR calculations 1-week prior to expiration
Click to Enlarge

What Is Our Real Return, 2.57% or 3.9%?

It’s 2.57%. To own the shares at $163.22 (current market value) we would have to buy back the option at $15.50. That would raise the real-life value of the shares from $150 (the option obligation) to $163.22 or + $13.22, leaving a net debit of $2.28 or 1.5%. This must be factored into our real-life returns. Rolling the option will also result in one less commission than closing the entire original position and re-opening at $163.22.

When Should the Option Be Rolled?

Next week. Dave had huge downside protection of his initial option profit and was fairly safe to max the returns from his original trade. Time value erosion of the option premium is logarithmic in nature, not linear, so the near term option time value will deteriorate faster than the next month option. It will be advantageous to us to wait closer to expiration to begin the rolling process.

By Alan Ellman of

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