Analyzing a Rolling-Up Covered Call Writing Trade: A Real-Life Example with Sinclair Broadcast Group, Inc. (NASDAQ: SBGI) – June 28, 2021
Covered call writing exit strategies include rolling-out and rolling-out-and-up but what about rolling-up in the same contract month? On January 4, 2021, Court shared with me a series of trades she executed with SBGI where a covered call trade was rolled-up as share price accelerated. This article will dissect all aspects of the trades and come to several trading perspective.
Court’s trades
- 12/14/2020: Buy 100 x SBGI at $28.19
- 12/14/2020: Sell-to-open (STO) 1 x 1/15/2021 $29.00 call at $1.70
- 1/4/2021: Buy-to-close (BTC) the $29.00 call at $3.50
- 1/4/2021: Sell 100 shares SBGI at 32.16
- 1/4/2021: Buy 100 x SBGI at $32.15
- 1/4/2021: STO 1 x 1/15/2021 $32.00 call at 1.35
Initial calculations with the Ellman Calculator
The spreadsheet shows an initial 12-day time-value return of 6% with the possibility of an additional 2.9% should SBGI move up to the $29.00 strike price at expiration. This results in a maximum return of 8.9%.
Calculating the time-value cost-to-close using the “Unwind Now” tab of the Elite and Elite-Plus Calculators
The time-value cost-to-close is 1.21%, lowering our max return from 8.9% to 7.7%.
Court’s 2nd trade in the same contract month (cost-basis is $29.00)
The spreadsheet shows an additional initial time-value return of 3.8%.
Discussion and analysis
- The initial trade had a max return of 8.9% (6% + 2.9%). That’s where the trade stood on 1/4/2021
- When the short call was rolled, there was no need to sell the stock for $32.16 and buy it back for $32.15
- The calculator shows a cost-to-close of 1.2% which makes sense (8.9% – 1.2% = 7.7%)
- The new trade depends on SBGI remaining at or above the appreciated $32.15 price
- My preference when stock value moves up and option value approaches zero (not the case here), is to close the entire position and enter a new one where the initial time-value return is at least 1% more than the time-value cost-to-close.
- On 1/4/2021, no action was needed.
Author: Alan Ellman