Rolling-Out Decisions for Our Covered Call Writing Trades: 3 Strategies Analyzed – March 4, 2024
When our covered call writing strikes are expiring in-the-money (with intrinsic-value), our shares will be sold at the strike price. We may opt to retain the shares by rolling the option to a later date. This article will highlight 3 paths we can take and discuss the factors that will guide us to our final decisions.
Hypothetical rolling scenario
- 9/18/2023: 100 x BCI purchased at $48.00
- 9/18/2023: STO 1 x 10/20/2023 $50.00 call at $1.50
- 10/20/2023: BCI trading at $52.00
- 10/20/2023: If we take no exit strategy intervention, shares will be sold at $50.00 (allowing exercise)
- 10/20/2023: Cost-to-close the 10/20/2023 $50.00 call is $2.05
- 10/20/2023: Bid price for the 11/17/2023 $50.00 call is $3.50 (to roll-out)
- 10/20/2023: Bid price for the 11/17/2023 $55.00 call is $1.95 (to roll-out-and-up)
Factors that determine which path to follow
- Do we want to retain the shares for the next contract cycle (including no upcoming earnings report)?
- Will the rolling calculations align with our pre-stated initial time-value return goal range (2% – 4% per-month, as 1 example)?
- Are we bullish (favor rolling out-and-up) or bearish (rolling-out) on the overall market?
Allowing exercise calculations using the BCI Trade Management Calculator (TMC)
- Section 1 shows trade entries
- The Trade Management Calculator (TMC) shows a 33-day trade, if taken through contract expiration (red circle)- section 2
- The initial time-value return is 3.13%, 34.56% annualized (brown cells)- section 2
- By “allowing exercise”, shares are sold at $50.00 (red arrow)- section 3
- Section 4 shows a final realized 33-day return of 7.29%
Rolling-out to the 11/17/2023 $50.00 strike (defensive exit strategy)
- The net premium is $1.45 ($3.50 – $2.05)- red circle
- The initial time-value return is 2.90%, 40.71% annualized, based on a 26-day trade (brown cells)
- There is no upside potential or downside based on a $50.00 price (green cells)
- Keep in mind, that shares are actually $52.00 at the time of the roll, but only worth $50.00 to us, due to our contractual obligation to sell at $50.00
Rolling-out-and-up to the 11/17/2023 $55.00 strike (aggressive exit strategy)
- The net premium is -$0.10 ($1.95 – $2.05)- red circle
- The initial time-value return is -0.20%%, -2.81% annualized, based on a 26-day trade (brown cells)
- There is 10% upside potential based on a $50.00 price (green cell)
- Keep in mind, that shares are actually $52.00 at the time of the roll, but only worth $50.00 to us, due to our contractual obligation to sell at $50.00
Discussion
When our covered call writing strikes are expiring in-the-money, there are several exit strategy paths we can take. This article highlighted allowing exercise, rolling-out and rolling-out-and-up. Mastering and focusing in on the factors discussed will guide us to the appropriate path to take.
Author: Alan Ellman