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When our strike prices are in-the-money as expiration approaches and we don’t want our shares sold, we must close the current month option and roll to the next month. Rolling can include rolling-out to the same strike or rolling-out-and-up to a higher strike. This podcast breaks down the calculations to show why the total cost isn’t the most important stat that should determine our trade decisions. A discussion of time-value and intrinsic-value will be included as well as a discussion of the Ellman Calculator.
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I do love your clear and important explanations. Always.
Rolling out, or out and up is a very challenging decision almost each and every month, especially for me because, as you know, I focus on monthly CC trades almost exclusively.
And normally, I always decide against it when the trade is deep ITM. I do not see a significant advantage
If I bought FIVE at 76.19 and sold the 75.00 calls for 2.86, expecting to gain 2.3% at expiration, it means I had protection, and as the stock climbed to 102.09, I am fully rewarded when I am assigned. I don’t care if the buyer of my calls has made a great profit, much more than myself. Who cares?
I question myself: 1 – will the stock continue to go up after raising 33% in one month? 2 – will this ticker be a bold ticker on Barry’s list on Sunday? Will the whole market be trending up on Monday?
If yes, yes, and yes, I can always place a new trade on FIVE next week, at almost the same price, with more insight than today, or chose a better prospect from barry’s list.
Maybe I’m just too fearful.
No, I don’t think you are too fearful. I believe you have it dead right. I feel exactly the same way.
Keep up the good work.
Thank you for your support and agreement.
I know that you are a very experienced investor and capable of interpreting the charts easily, therefore, your comment is very reassuring
I certainly understand your concern and not every situation of a deep ITM strike should motivate us to roll-out-and-up. Let me offer this 3-step thought process that may be of value to you:
We must first determine if the stock meets our system criteria in terms of fundamental analysis, technical analysis and common-sense principles (including no upcoming earnings report). Since the share price has accelerated and there was no intervening earning report, that is usually the case.
Next, we ask ourselves this question: Had I not been in this trade in the current expiring contract month, would this be a stock I would want to include in my portfolio for the upcoming contract?
If the answer, based on our screening analysis, is yes, then we run the calculations with the “What Now” tab of the Ellman, Elite and/or Elite-Plus Calculators to see if the initial time-value return goal range is met. If the answer is no, then we allow assignment.
By taking this structured approach, more often than not, we will be able to identify real exit strategy opportunities and reject those that may hurt us.
Thank you Alan for the important observations.
My problem is determining system criteria.
I am not skilled in interpreting the charts and evaluating the technical aspects, and that is why I trust BCI 100% to do this for me, but this information is not available on expiration Friday when I need to decide.
My Schwab page gives me access to “Market Edge Second Opinion Weekly” but the technical information is also dated.
I understand that I might be missing out on some opportunities.
Thanks again – Roni