Covered call writing and put-selling are strategies that require us to master three skills: stock selection, option selection and position management or the use of exit strategies. One of the exit strategies available to us as expiration approaches is rolling options where the near-month option is closed (buy-to-close) and the next month’s option is sold (sell-to-open). We can roll out where the near and next month options have the same strike prices (buy back the August $50.00 call and sell the September $50.00 call) or we can roll out and up to a higher strike price (buy back the August $50.00 call and sell the September $55.00 call). Rolling options generally takes place close to contract expiration, prior to 4 PM ET on the third Friday of the month (for Monthly options). I developed the “What Now” tab of the Ellman Calculator to help us decide if rolling makes sense for our new portfolio positions.
The “What Now” tab of the Ellman Calculator
The screenshot below shows the location of this tab in the Basic Ellman Calculator (the Elite version of the Ellman Calculator has seven more tabs):
The input information required in the blue fields on the left side of the spreadsheet are:
- Stock name/symbol
- Number of shares
- Purchase price
- Current price
- Price of option sold
- Current price of option
- Price of next month’s same strike
- Price of next month’s higher strikes
Here is a hypothetical example using the “What Now” tab:
Note the following:
- BCI was purchased for $32.00
- The $34.00 call was sold for $1.00
- The current share price is $35.50
- The cost to close the $34.00 call is $1.60
- The next month $34.00 call generates $2.50 (rolling out)
- The next month $36.00 call generates $1.50 (rolling out-and-up)
- The red arrow reminds us to make sure that there is no earnings report in the upcoming contract month
Calculations generated on the right side of the spreadsheet:
What if we roll the option (top)?
The calculator determines that we have a net options credit of $90.00 on a cost basis of $3400.00 (current market value of 100 shares based on our option obligation) = a 2.65%, 1-month return. Since the strike is in-the-money, we also have a 4.20% protection of that profit (different from breakeven).
What if we roll out and up to the $36.00 strike (bottom)?
In this scenario, we actually have an option debit of $10.00 but our share value moves up from $34.00 (our option obligation) to $35.50 (current market value) resulting in an initial 1-month unrealized return of 4.12%. Should BCI move to the $36.00 strike by expiration, our 1-month return would be 5.59%
The “What Now” tab of the Ellman Calculator will allow us to calculate returns when rolling options. Based on our current market assessment, chart technicals and personal risk tolerance we can opt for rolling out, rolling out-and-up (more aggressive) or taking no action and allowing assignment if calculations do not meet our goals.
***For a FREE copy of the Basic Ellman Calculator, click on the “Free Resources” link on the top black bar of these web pages. The Elite Calculator is free to Premium Members and for sale to general members in our Blue Collar store.
Attention teachers- Now available:
At the request of the University of Maryland where my book, Stock Investing for Students, is required reading for the finance honors program as well as the freshman class, I have written a 46-page E-Book consisting of chapter questions and answers for examination purposes. This file is available for FREE upon request via school letterhead or school email address. Hard copies will also be available in the next few weeks.
Upcoming live events
September 10th, 2016
Silicon Valley (San Francisco) California
8:30 AM – 12 PM
I am the 2nd of 2 speakers
Registration link to follow
October 24th, 2016
Registration link to follow
November 5, 2016
Plainview, New York
Saturday morning 3-hour workshop at the Plainview Holiday Inn. I am the only speaker and plan an information-packed presentation covering 5 actionable ways to make money or buy a stock at a discount using both call and put options. I’ll provide registration information once I receive it from the host investment club.
Global stocks moved up this week, partly the result of a rebound in prices for crude oil. The Chicago Board Options Exchange Volatility Index (VIX) edged higher, to 11.55 from 11.3 a week ago. This week’s reports and international news of importance:
- US retail sales were unchanged in July, a disappointing sign for an economy being depending on consumer consumption
- A 0.4% drop in the Producer Price Index reinforces the notion that despite strong labor markets, the Fed will stay on the monetary sidelines at least in the near-term
- The Bank of England (BOE) relaunched its quantitative easing program this week and ran into an immediate liquidity problem
- A BOE business conditions survey showed that firms expect weaker investment, hiring and turnover in the coming months
- After a down first-quarter earnings seasons, major US retailers posted better-than-expected results this week, sending their share prices higher
- The Reserve Bank of New Zealand trimmed its official cash rate 25 basis points to 2.0%. Many had expected a deeper 50 basis point cut, so the New Zealand dollar soared on the news, hitting a one-year high
- Fed governor Jerome Powell, in an interview with the Financial Times, said that with inflation below target, the Fed can be patient on raising rates
- The European Union, citing exceptional circumstances, this week waived fines for Spain and Portugal after the two countries exceeded EU budget deficit caps
- Productivity has fallen for three straight quarters, the US Department of Labor reported this week. That’s the longest slump in output per worker since 1979. Falling productivity is raising concerns about corporate profits and the pace of future hiring
- For the first time since 1999, all three major US equity indices closed at record highs on Thursday. The Nasdaq Composite Index joined the Dow Jones Industrial Average and the S&P 500 Index in record territory
- Industrial production, fixed asset investment and retail sales data from China all failed to meet market expectations on Friday
THE WEEK AHEAD
- Japan reports its June industrial production data on Monday, August 15th
- The minutes of the US Federal Reserve’s Federal Open Market Committee meeting will be released on Wednesday, August 17th
- UK July retail sales data are reported on Thursday, August 18th
- Accounts of the European Central Bank’s monetary policy meeting are released on Thursday, August 18th
- Canada releases July retail sales figures on Friday, August 19th
For the week, the S&P 500 moved up by 0.05% for a year-to-date return of +6.85%.
IBD: Market in confirmed uptrend
GMI: 6/6- Buy signal since market close of July 1, 2016
BCI: Moderately bullish favoring out-of-the-money strikes 2-to-1
WHAT THE BROAD MARKET INDICATORS (S&P 500 AND VIX) ARE TELLING US