Rolling-In Covered Call Trades – August 1, 2022
Exit strategy implementation is a critical aspect of successful covered call writing and put-selling strategies. Over the years, we have discussed rolling options as an integral part of our position management arsenal. This article will detail a new rolling strategy… rolling-in.
Rolling definitions
- Rolling-up: Close out options at a lower strike and open options at a higher strike
- Rolling-down: Closing out options at one strike price and opening options at a lower strike price
- Rolling-out (forward): Closing out options at a near-term expiration and opening at the same strike at a later date. Can be combined with rolling-up or rolling-down.
- Rolling-in: Closing out options at a current-term expiration and opening at the same strike at an earlier date
When to consider rolling-in
Avoid risky corporate or market events
- Earnings reports
- Fed announcement
- FDA product announcement
- Corporate news conference
- Political events
Personal business commitments: unavailable to monitor trades
- Family vacation
- Business trip
- Hospital stays/medical reasons
Must liquidate position by a specific date
- Cash needed for other obligations
Real-life example with Etsy, Inc. (NASDAQ: ETSY)
- 2/15/2021: Buy 100 x ETSY at $233.86
- 2/15/2021: STO 1 x 3/19, 2021 $240.00 call at $16.90
- 2/22/2021: BTC 1 x 3/19/2021 $240.00 call at $17.60
- 2/22/2021: STO 1 x 3/12/2021 $240.00 call at $15.50
- 3/12/2021: ETSY trading at $242.11 and exercise is allowed as shares are sold at the $240.00 strike
Initial trade entries
Initial trade returns
The spreadsheet shows a 33-day initial return on the option (ROO) of 7.23% with an additional upside potential of 2.63%, should share price rise to the $240.00 OTM strike by expiration. The total potential maximum return is 9.86%.
Trade adjustment entries
The 3/19/2021 expiration is rolled-in to the 3/12/2021 expiration at a net option debit of $$2.10 ($17.60 – $15.50).
Final calculations
The spreadsheet shows a final combined stock and option return of 8.95%, slightly lower than the initial maximum return of 9.86%. Keep in mind that the cash involved the trade will have an additional week to re-invest to mitigate the minor decrease in the maximum return. However, the exit strategy avoided a potential risky event in the final week of the March contracts.
Discussion
Rolling-in is a new and additional position management technique that can be utilized to avoid risky events as well as allow for better management and needs. The cost to roll-in will typically be low or may result in a higher annualized return but will always lower the overall risk inherent in our portfolio positions.
Author: Alan Ellman