Rolling Up in the Same Contract Month: Evaluating a Real-Life Trade

07/28/2015 8:00 am EST

Focus: OPTIONS

Alan Ellman

President, The Blue Collar Investor Corp.

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:

chart
Click to Enlarge

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

Discussion

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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