How to Become a Better Options Trader by Rolling Up Contracts

Focus: OPTIONS

Alan Ellman Image Alan Ellman President, The Blue Collar Investor Corp.

For the benefit of all option traders, Alan Ellman of thebluecollarinvestor.com, highlights an exit strategy that is useful for both covered call writing and put-selling.

Rolling up is a useful exit strategy for both covered call writing and put-selling. However, in my humble opinion, it rarely benefits us to roll up in the same contract month. The main reason for this conclusion is that we are dealing with a stock that has substantially appreciated in value in a relatively short time frame. The success of the rolling up strategy in the same contract month is dependent on that stock maintaining that share value or even accelerating even higher. In other words, we are asking a lot of this security while risking our unrealized gains from the initial option sale. In this article we will evaluate a trade shared with me by Preacher John of Mexico (they call him Preacher in Cancun where he teaches the BCI methodology):

The initial trade in one-contract format

3/22/2015: Buy 100 x PAYC at $51.10

3/22/2015: Sell 1 x $50.00 call at $2.10

3/22/2015: Initial returns are 2% with downside protection (of that profit) of 2.2% as shown in the screenshot below using the multiple tab of the Ellman Calculator:

chart
PAYC: Initial returns using the Multiple tab of the Ellman Calculator
Click to Enlarge

Position evaluation six days later

  • PAYC price moves up to $56.69
  • Value of the $60.00 call (“ask”) is $7.10
  • Bid price of the $55.00 call (should we decide to roll up in the same month) is $2.55

Situation if we do not roll up in the same contract month
We are guaranteed a 2%, 1-month return as long as share value does not decline by more than 12% by expiration (move from $56.69 to under $50.00). This represents a safe scenario where our initial investment has been maximized.

Situation if we do roll up in the same contract month
Our maximum share appreciation is now up to the $55.00 strike which represents a credit of $3.90 from the initial purchase price of $51.10.