Rolling Call Options On Or Near Expiration Friday

Updated: Aug 12, 2019

One of the reasons why I love option selling strategies is the amount of flexibility you have compared to traditional investing. Before we go any further into great detail on the subject called 'rolling options', I always want to remind you of the pronged skill set of understanding market assessment, determining your own personal risk tolerance (the more conservative you are the more you'll trade profitably), carefully cherrypicking the best-performing stocks based on technical and fundamental analysis, mastering exit strategies and leaving all your emotions at the door...


Rolling Options: Why And When?

When we sell a covered call and the share price has surged dramatically during the contract period and there's no opportunity to unwind our position, we may want to hold onto the stock if chart technicals dictate that the security remains eligible for our system. We know that the option is in-the-money and that our shares will get called away on expiration Friday unless we buyback our short-term obligation. In short, we buyback the option and sell the next month's option to generate a new one-month cash flow with the same stock. Let me highlight the following example for you utilizing Verisk Analytics (VRSK), a wonderful company which has been on my watchlist for quite some time now.


On February 19, 2019 an earnings report came out, initially sending shares down. By February 21, 2019 shares had recovered most of these losses and covered calls were sold:

  • At-the-money calls with a strike price of $125 expiring on March 15, 2019 for $2.41 when shares were trading at $124.63

  • An upcoming ex-dividend date (cash dividend of $0.25) on March 14, 2019

The trade would produce an initial return of 2.13% while potentially returning a 2.43% if shares close above $125 at expiration Friday. Our breakeven level amounts to $121.97. Since sell an out-of-the-money call we don't have downside risk protection of the time value (actual profit), so the $2.41 premiums is just time value. Stated differently, the premium doesn't consist of intrinsic value.

At the end of the contract month, shares stood at $128.77 leaving our option obviously in-the-money. Now, the technical status was still favorable and I decided to take a look at the premiums for the next month's options to see whether rolling the options made sense. And it did. Let's take a look at the screenshot provided below.

Allowing assignment would result into a realized gain of 2.13% excluding commissions. Now, what if we buyback the option and roll out to the next month's strike? When we are more conservative and slightly bullish to neutral (maybe slightly bearish as well) we will stick with that very same strike price of $125 in order to get downside risk protection of the profit (if you recall that the $125 strike is in-the-money by $3.77, we get protection in excess of 3% which does not represent our breakeven!). If we roll out and UP, we raise our strike price from $125 to - in this example - $127.50.


What does the calculator tell us?

  • If we allow assignment, we fully pocket the 2.13%. At that point in time our shares are worth $125, not $128.77 since we are obligated to sell at the strike price. $125 will be the comparative cost basis to assess whether rolling the options to the next month's options cycle could bear fruit.

  • If we roll out to $125, we buyback the current option which is about to expire in-the-money (we normally execute these trades on expiration Friday when time value approaches almost zero) and sell the April calls with a strike of $125. We miss out on 0.16% of time value by buying back the option (which has little time value left). These transactions will result in a one-month return of 1.27% for the April calls with downside risk protection from $128.77 to $125.

  • If we roll out and up to the $127.50 strike, we now generate less cash premium but we've increased the value of our shares from $125 up to $127.50 since the $127.50 is also in-the-money. These transactions will produce a new one-month return of 2.27% for the April calls with downside risk protection from $128.77 to $127.50.

Based on my personal goals and risk profile (a return of at least 2% in normal market conditions), I would go with the $127.50 because of bullish chart technicals and a juicy return of 2.27% the following month. If we could do this every month, that would turn out to be an annualized return of 30%...


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