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How to Enter Our Rolling-Out-And-Up Trades into Our Monthly Trading Logs

In our last blog article, we discussed how to enter our rolling-out trades into our covered call writing trading logs. This article will highlight the additional considerations when rolling our covered call trades out-and-up.

 

Trade log challenges when rolling-out-and-up

  • We are combining 2 months of option premiums: how do we break this down?
  • What cost-basis do we use for the next contract month?
  • When we roll-out, we are almost always rolling-out to an in-the-money (ITM) strike but when we roll-out-and-up, we can be rolling to an in-the-money, at-the-money or out-of-the-money strike. How does this impact our trade entries?

 

Hypothetical trade

  • 12/27/2021: Buy 100 x BCI at $48.00
  • 12/27/2021: STO 1 x 1/21/2022 $50.00 call at $1.50
  • 1/21/2022: BCI trading at $52.00
  • 1/21/2022: BTC the 1/21/2022 $50.00 call at $2.05
  • 1/21/2022: STO the 2/18/2022 $51.00 ITM call at $2.50
  • 1/21/2022: STO the 2/18/2022 $52.00 (ATM) call at $4.00
  • 1/21/2022: STO the 2/18/2022 $55.00 (OTM) call at $1.00

 

BCI guidelines for rolling trade entries: current contract month

The current month concludes with the final stock price at the in-the-money strike (we generally roll strikes that are ITM), our contract obligation. This means we have maximized our trade as initially structured as shown in this screenshot:

and Up: 1st Month Entries and Calculations

In these hypothetical trades, a 1-month 7.29% (brown cells) return were realized.

 

BCI guidelines for rolling trade entries out-and-up: next contract month

At the time we roll the option, shares can be worth no more than our contract obligation to sell at $50.00, so we enter $50.00 as the price per-share. Since we are rolling-out-and-up, the strike can be ITM, ATM or OTM and we enter the new contract expiration date, 2/18/2022, in this case. We then use the net BTC and STO net option credit or debit our option $/Share entry.

Important note: The net premium will be a negative number when the cost-to-close the current month strike is greater than the next month premium. This deficit is largely negated by the unrealized share appreciation created when the lower strike is removed.

 

Rolling-out-and-up to an ITM, ATM and OTM strikes: Next month trade log entries

The net option premiums based on the next-month and current month premiums are as follows:

  • $51.00 ITM strike: $2.50 – $2.05 = +$0.45
  • $52.00 ATM strike: $4.00 – $2.05 = =$1.95
  • $55.00 OTM strike: $1.00 – $2.05 = (-) $1.05

The trade entries and calculations are shown in the screenshot of the of the BCI Trade Management Calculator:

and UP: 2nd Month Entries and Calculations

 

  • The $51.00 ITM strike has a potential 1-month return of 2.9% (0.9% + 2.0%)
  • The $52.00 ATM strike has an initial time-value return of 3.9%. The 4.0% upside potential will be realized if share value remains at or above the current price of $52.00
  • The $55.00 OTM strike has a potential 1-month return of 7.9% (-2.1% + 10.00%). Notice the negative time-value return which is mitigated by the unrealized share appreciation when the current month strike was elevated
  • As with rolling-out, there is the (minor) flaw in this approach for ITM strikes (red circled area). In the brown cell, we see of 0%, when, in fact, it is 1.9% ($1.00/$52.00) because the shares are, in fact, trading at $52.00 at the time of the roll

 

Discussion

When rolling-out our covered call trades out-and-up, we must break up our trade entries over the 2 contract cycles. This includes having rules and guidelines for:

  • Stock price entry
  • Final stock price
  • Dividing option credits and debits over 2 contract cycles
  • -and-up to ITM, ATM and OTM strikes

These trade entry rules and guidelines are not perfect, but they are practical and represent the best way to reflect our current trade status.

 

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About Alan Ellman

Alan Ellman loves options trading so much he has written four top selling books on the topic of selling covered calls, one about put-selling and a sixth book about long-term investing. Alan is a national speaker for The Money Show, The Stock Traders Expo and the American Association of Individual Investors. He also writes financial columns for both US and International publications along with his own award-winning blog.. He is a retired dentist, a personal fitness trainer, successful real estate investor, but he is known mostly for his practical and successful stock option strategies.

7 Responses to “How to Enter Our Rolling-Out-And-Up Trades into Our Monthly Trading Logs”

  1. Barry B September 10, 2022 10:30 pm
    #

    Premium Members,

    This week’s Weekly Stock Screen And Watch List has been uploaded to The Blue Collar Investor Premium Member site and is available for download in the “Reports” section. Look for the report dated 09/09/22.

    Also, be sure to check out the latest BCI Training Videos and “Ask Alan” segments. You can view them on The Blue Collar YouTube Channel. For your convenience, the link to the BCI YouTube Channel is:

    http://www.youtube.com/user/BlueCollarInvestor

    Reminder: Premium members are grandfathered into your current rate and will never see a rate increase as long as membership remains active.

    Best,

    Barry and The Blue Collar Investor Team
    [email protected]

  2. Howard September 11, 2022 3:44 am
    #

    Alan,

    In your books, you favor rolling down in the last 2 weeks of a monthly contract which is where we are now. My question is how do you decide which strike to roll down to?

    Thanks,
    Howard

    • Alan Ellman September 11, 2022 8:26 am
      #

      Howard,

      As a guideline, I typically roll-down to an out-of-the-money strike and try to generate a net option credit. Let me set up a hypothetical example:

      Buy 100 x BCI at $48.00

      STO 1 x $50.00 (monthly) call at $1.50

      In the last 2 weeks of the contract, BCI drops to $43.00

      BTC 1 x $50.00 call at $0.15 (10% guideline)

      STO 1 $45.00 call at $0.85 (roll-down to an OTM strike)

      This represents a net rolling credit of $70.00 per-contract ($85.00 – $15.00)

      The rationale behind these guidelines is that we are creating additional premium credits while still allowing for some share price recovery.

      This approach will benefit our portfolios much more often than not.

      Alan

  3. Donna September 12, 2022 6:37 am
    #

    Dear Alan,

    1)Is there a significant difference from the results of using the BCI Elite Calculator to predict trade results or is it that it gives the amount of a standard deviation and price range probability which the Delta alone does not give.

    Can’t this be determined if the Delta is 16 (84% probability) with an ATM strike without using the Elite Calculator?

    2) Early this morning Professor Segal was on CNBC discussing buying stocks now when the VIX is high(20 or over) should result in very good yields for investors as in these current conditions he felt inflation was coming down and he had turned bullish.

    Which of your articles or videos have addressed similar issues as they apply to covered call options? I have all your publications and materials.

    Thank you.

    Donna
    Premium Member

  4. Alan Ellman September 13, 2022 7:13 am
    #

    Premium members,

    The latest Blue Chip Report for the top-performing Dow 30 stocks has been uploaded to your member site. This report is for the October 2022 contracts and is located in the “resources/downloads” section (right side).

    Alan & The BCI team

  5. Alan Ellman September 14, 2022 5:05 pm
    #

    Premium members:

    This week’s 4-page report of top-performing ETFs and analysis of the top-performing Select Sector SPDRs has been uploaded to your premium site. One and three-month analysis are included in the report. Weekly performance has also been incorporated into the report although not part of the screening process. Weekly option availability and implied volatility stats are also incorporated.

    The mid-week market tone is located on page 1 of the report.

    New members check out our ongoing and never-ending training videos (“Ask Alan” and Blue Hour webinars). We add at least one new video each month. Only premium members have access to the entire library of these training tools.

    Reminder: Premium members are grandfathered into your current rate and will never see a rate increase as long as membership remains active.

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