Establishing Our Cost-Basis When Rolling Out-And-Up on 2 Different Days – February 15, 2021
One of our covered call writing exit strategies is rolling-out-and-up. We use this position management technique when our short call is in-the-money (ITM) as expiration approaches and we decide to retain the shares for the next contract month (or week). For example, had we bought a stock for $38.00 and sold the $40.00 call and the shares were trading at $42.00 as expiration approached, we could roll-out-and-up to the $45.00 strike prior to 4 PM ET on expiration Friday. In this case, the cost-basis is $40.00, the value of our shares at the time of the exit strategy. What is our cost-basis if the $40.00 call was closed on expiration Friday and the higher strike wasn’t sold until the following week? This now becomes 2 separate trades. Let’s break down the calculations using a real-life example (provided by Steve) using Global X Silver Miners ETF (NYSE: SIL).
Steve’s SIL rolling trades
- 7/6/2020: Buy 100 x SIL at $36.93
- 7/6/2020: Sell-to-open (STO) the 7/17/2020 $36.00 call for $1.45 (1.44% 11-day initial time-value return)
- 7/17/2020: SIL trading at $41.14
- 7/17/2020: Buy-to-close (BTC) The $36.00 call at $5.20
- 7/20/2020: STO the 8/21/2020 $45.00 call at $1.15 (SIL trading at $43.14, $2.00 higher than Friday)
- 7/20/2020: What is our cost-basis after selling the new $45.00 call?
SIL price chart during these trades
SIL Price Chart July 2020
Cost-to-close the $36.00 call using the “Unwind Now” tab of the Elite and Elite-Plus Calculators
When factoring in unrealized share appreciation from $36.00 (contract obligation to sell) to current market value of $41.14, the time-value cost-to-close is $6.00 per-contract or 0.17%
Cost-basis for the 8/21/2020 STO covered call trade
The realized profit generated from the original covered call trade and share appreciation over the weekend are not factored into the cost-basis we use for the new August contract position. We always use current market value when initiating a new trade, in this case $43.14.
Using the “Multiple tab” of the Elite-Plus or Basic Ellman Calculator we see that there is a robust 2.7% initial time-value return plus 4.3% of upside potential if share price moves up to or higher than the $45.00 strike by contract expiration.
Author: Alan Ellman