Rolling Out and Up to ITM and OTM strikes: A Real-Life Example with Invesco QQQ Trust (Nasdaq: QQQ) – May 16, 2022
When our covered call writing strikes are expiring in-the-money (ITM), and we want to retain the underlying shares for the next contract period, we can roll the option forward. This involves buying back the current short call(s) and selling the next month (or week etc.) strike. If we roll-out, we always roll-out to an ITM strike because if a strike is ITM at the time of the roll, it will still be ITM for the next contract, as well, at the time of the exit strategy execution. However, if we roll out-and-up, the later-date strike can be ITM, ATM or OTM. This article will highlight such scenarios using QQQ.
Real-life trade with QQQ as of 11/20/2021
- 10/19/2021: Buy 100 x QQQ at $374.92
- 10/19/2021: Sell-to-open (STO) the 11/19/2021 $380.00 call at $3.74
- 11/18/2021: QQQ trading at $397.15
- 11/18/2021: Cost-to-close (CTC) the 11/19/2021 $380.00 call is $17.31
- 11/18/2021: Evaluating rolling-out and rolling-out-and-up
Option-chain information on 11/18/2021
- CTC the near-month $380.00 call: $17.31
- STO the 12/17/2021 $380.00 call: $20.82 (rolling-out)
- STO the 12/17/2021 $395.00 call: $9.83 (rolling out-and-up to an ITM strike)
- STO the 12/17/2021 $400.00 call: $7.10 (rolling out-and-up to an OTM strike)
Entering the information into the “What Now” tab of the Trade Management Calculator
Information is entered for rolling out to the same $380.00 strike and out-and-up to the ITM $395.00 strike.
Rolling final calculations for the $380.00 and $395.00 strikes
Rolling-out generated a 1-month initial time-value return of 0.92% with a 4.30% downside protection of that time-value profit; while rolling out-and-up to the ITM $395.00 strike generated an initial 1-month time-value return of 1.98% with 0.50% downside protection of that time-value profit.
Rolling final calculations for the $400.00 OTM strike
Rolling out-and-up to the $400.00 OTM strike generated a 1-month initial time-value profit of 1.83% with the possibility of a maximum 1-month return of 2.58% if share price rises to the OTM $400.00 strike by expiration.
Discussion
Rolling our ITM covered call strikes presents several opportunities. We can roll-out to the same strike or roll-out-and-up to ITM, ATM or OTM strikes.
Author: Alan Ellman