Comments on: Rolling Options Using the Ellman Calculator https://www.thebluecollarinvestor.com/rolling-options-using-the-ellman-calculator/ Learn how to invest by selling stock options. Thu, 01 Sep 2016 12:14:10 +0000 hourly 1 By: John G. Walter https://www.thebluecollarinvestor.com/rolling-options-using-the-ellman-calculator/#comment-59400 Fri, 19 Aug 2016 18:17:47 +0000 http://www.thebluecollarinvestor.com/?p=14162#comment-59400 In reply to Alan Ellman.

Thank you….. successful, yes, but over 4 months. In addition to the $8.14, there were two dividends of .77 each. Total return of 12.8%, annualized to 38.5%.

The anomaly here is the large equity gain in the stock of $4.5, something I don’t think I can count on in aggressive option trading.

I’m not a fan of rolling out & up. At least, I don’t often see it as a viable opportunity. If the stock were in a good entry position today (which it could be argued either way today), I might consider it? However, I think the benefit of opening up some time to enter, as well as finding a good entry for the Call is a lesser risk? No ex-dividend (or earnings report) on the near horizon, so only the need to get into a good option trade soon.

Thanks for your comments, your calculator, and your work.

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By: Alan Ellman https://www.thebluecollarinvestor.com/rolling-options-using-the-ellman-calculator/#comment-59392 Fri, 19 Aug 2016 17:17:16 +0000 http://www.thebluecollarinvestor.com/?p=14162#comment-59392 In reply to John G. Walter.

John,

This appears to be a rolling out-and-up opportunity. The shares are currently worth $80…allow assignment you get $80. Your trades have been quite successful…congrats on that. Now that’s all behind us. Should we roll out-and-up or allow assignment.

Let’s say we allow assignment and buy the shares on Monday for $84 (add an additional $4 to our cost basis) and sell the $85 call for a 1.3% return. Or we can roll out-and-up for $4.18 and sell the same $85 call. The only difference here is the $0.18 which will become less as we approach 4 PM ET. Not to mention one less trading commission when rolling.

The approaches are similar with a slight benefit to rolling (in my view) if prices don’t change over the weekend. Shares can open on Monday at $86 (or $82)…allowing assignment creates a bit more risk.

Alan

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By: John G. Walter https://www.thebluecollarinvestor.com/rolling-options-using-the-ellman-calculator/#comment-59390 Fri, 19 Aug 2016 17:00:13 +0000 http://www.thebluecollarinvestor.com/?p=14162#comment-59390 In reply to Alan Ellman.

That’s not exactly what I was saying. Example…..

I bought a stock in April for $75.50.

Soon after I sold a call at 80 for 1.93, which ultimately expired worthless.

Then I sold another call at 80 for 1.71, which is expiring today in the money around 84.

To roll it a month, it will cost me 4.18, netting .60 credit or only a .75% ROO

That doesn’t make sense to me unless the stock pulls back, and technicals do not suggest that.

It seems a better choice to allow exercise, pocket a total of $8.14, and start anew with this stock which I want to keep, selling an 85 for 1.33, which is more like a 2.1% ROO??

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By: Alan Ellman https://www.thebluecollarinvestor.com/rolling-options-using-the-ellman-calculator/#comment-59383 Fri, 19 Aug 2016 16:12:03 +0000 http://www.thebluecollarinvestor.com/?p=14162#comment-59383 In reply to John G. Walter.

John,

Here’s another perspective on “rolling” options for your consideration. I believe that by tying rolling decisions into previous trades can cloud our judgment. For example, if we originally bought a stock for $10 and today it is $100 and we sell a call for $1, our return is 1%, not 10%. It is based on current, not past, stats as long as we are not doing tax calculations.

So when it comes to rolling, we have maxed our near-month trade because the strike is in-the-money or we wouldn’t be rolling. Our shares are currently worth the strike sold, not a lower amount we paid for the stock or a higher amount of current market value. As you pointed out, our choice is to roll or allow assignment. Since we are near 4 PM ET on expiration Friday, the time value component of the option is approaching zero and so we pay mainly intrinsic value when we BTC the option (buy back). Let’s say we bought a stock for $48 and sold the $50 call for $1.50. On expiration Friday the stock is trading at $52 and the cost to close is $2.05. This has absolutely nothing to do with the initial $1.50 from the original sale. It is tied into the credit we are about to receive from the next month’s option as it relates to exit strategy decisions. The next month $50 call will generate $2 of intrinsic value and let’s say $1.25 of time value. That’s a 2.4% 1-month return with downside protection of that profit of 3.8%…why not at least consider it.

Looking at this same trade from a different angle, let’s say we didn’t own the stock in the now-expiring contract month but like it for the new contract. We would buy it at $52, not $50 and may favor an in-the-money strike…amounting to the same thing as rolling. The same case can be made for rolling out-and-up if more bullish on the stock.

Rolling options does not always make sense but I encourage our members to give it serious consideration as one of the important choices we have to generate the highest levels of option returns.

Alan

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By: John G. Walter https://www.thebluecollarinvestor.com/rolling-options-using-the-ellman-calculator/#comment-59372 Fri, 19 Aug 2016 14:41:51 +0000 http://www.thebluecollarinvestor.com/?p=14162#comment-59372 While I have done plenty of ‘roll outs’ (out & up never seems to make sense to me), the calculator has shown me that this strategy has (maybe?) not been the smartest choice (for me) in the past.

Unless the option is only slightly in the money, it doesn’t seem to make sense to buy it back (making it a losing trade vs. exercise), and then ending up with a new option (even at a credit), which is still in the money, and probably not one that I would have chosen in a brand new scenario.

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By: Alan Ellman https://www.thebluecollarinvestor.com/rolling-options-using-the-ellman-calculator/#comment-59370 Fri, 19 Aug 2016 14:30:15 +0000 http://www.thebluecollarinvestor.com/?p=14162#comment-59370 In reply to Nehemiah.

Nehemiah,

Yes, they do. Since we will generally be in the second half of a contract, it will be the 10% guideline that will apply in most cases. This will ensure that we will always retain 80% – 90% of our original option profit.

Alan

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By: Nehemiah https://www.thebluecollarinvestor.com/rolling-options-using-the-ellman-calculator/#comment-59369 Fri, 19 Aug 2016 13:26:13 +0000 http://www.thebluecollarinvestor.com/?p=14162#comment-59369 Are there different rules as it pertains to 20/10 with Weeklys

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