One of the covered-call writing exit strategies in our arsenal as expiration approaches is rolling in-the-money strikes out-and-up, explains Alan Ellman of The Blue Collar Investor.
This involves buying back the near-month strike and selling a higher strike in the next contract period. Since there is an intrinsic-value component to the cost-to-close, we must add additional cash to the position in order to execute this transaction.
Hypothetical example
- Buy 100 x XYZ at $80.00
- STO $100.00 call at $3.00
- At expiration, XYZ is trading at $120.00
- BTC the $100.00 call at $20.10 ($20.00 intrinsic-value)
- STO the next month $140.00 call at $3.00
Time-value credit aside, we had to add $2000.00 per contract to keep the trade viable. The good news is that we now have a stock worth $20.00 more (unrealized share value gain) than the previous strike would allow. However, additional cash is required to execute this rolling-out-and-up trade.
Real-life example with Intel Corp. (INTC) on 3/19/2021 with INTC trading at $64.50
- 3/19/2021: BTC the $60.00 call at $4.55 ($4.50 is intrinsic value)
- 3/19/2021: STO the 4/16/2021 $65.00 call at $2.37
- Rolling time-value credit: $2.37 – $0.05 = $2.32 per share = 3.87%
- Cash required to add to trade negated by increase in share value = $450.00 per-contract
Option Chains
INTC Option-Chain to Close March Contract
INTC: Option-Chain to STO the April Contracts
Discussion
Rolling an in-the-money covered call out-and-up will result in a time-value credit. However, to accomplish this, additional cash will need to be added to the trade in the form of intrinsic value. This additional cash is neutralized (at the time of the trade) by the increase in share value from the original strike price to the lower of the current market value or the new strike.
Learn more about Alan Ellman on the Blue Collar Investor Website.
