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Rolling Up in the Same Contract Month: Evaluating a Real-Life Trade
07/28/2015 8:00 am EST
Alan Ellman, of TheBlueCollarInvestor.com, highlights one of the three required skills for covered call writing and selling cash-secured puts—mastering exit strategies—and he evaluates a subscriber's real world trade involving rolling up in the same contract month.
Mastering exit strategies is one of the three required skills for covered call writing as well as selling cash-secured puts. In this article I will review and evaluate a real-life trade executed by one of our members. The trade involves rolling up in the same contract month with BWLD when share price accelerates significantly.
The initial trade
- 11/12/2014: Buy BWLD at $144.53
- 11/12/2014: Sell-to-open (STO) the December $145.00 call at $4.70
One week after initial trade
- 11/19/2014: BWLD trading at $150.00
- 11/19/2014: Buy-to-close (BTC) the $145.00 call at $7.40
Two weeks after initial trade
- 11/26/2014: BWLD still trading at $150.00
- 11/26/2014: STO the $150.00 call at $3.00
The question we are evaluating is whether the best path to take was to roll the option up from the $145.00 strike to the $150.00 strike. Here is the Ellman Calculator showing results if no action was taken:
If no action was taken and share price did not decline below $145.00, a 3.6%, one-month return would be realized. This profit is protected by $5.00 (down to the $145.00 strike) or 3.3%. This is a great position and return for conservative investors.
Calculations after rolling up
- Option credits: $4.70 + $3.00 = $7.70
- Option debit: $7.40
- Net option credit: $0.30
- Share appreciation: $5.47 ($150.00 – $144.53)
- Net credit: $5.77 = 4%
- Downside protection of this credit: $0
By taking no action, we generate a 3.6%, one-month return with 3.3% protection of that profit. By rolling up, we generate a slightly higher 4.0%, one-month return with no protection of that profit on a stock that has accelerated significantly in a short time frame. For most conservative retail investors, taking no action is the prudent approach.
Other exit strategy possibilities
Should share price rise causing the $145.00 strike to trade near parity (all intrinsic value), the mid-contract unwind exit strategy may come into play (see pages 264 – 271 of the Complete Encyclopedia for Covered Call Writing). Also, should the strike remain in-the-money as expiration approaches we may still consider rolling out or rolling out and up.
By Alan Ellman of TheBlueCollarInvestor.com
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