beginners corner

Rolling Out-and-Up After Understanding the Math

Elite covered call writers understand the importance of position management in maximizing returns. As a result, I receive a significant number of inquiries regarding exit strategy execution. This article will highlight one such question I received from John which has two components to it. The main item relates to rolling-out-and-up, a frequently-used exit strategy in our arsenal.  The second aspect of John’s question I will address first because it caught my attention and I needed to get an answer before I addressed the main issue of rolling options. Here’s John’s question See if you can find my mathematical concern:


John’s question

I own 300 shares of FIVE at $40.26 and sold the $38.00 call for a net of $434.00 for the three contracts. FIVE is now trading at $43.99 and wondering if I am better off being assigned or rolling out-and-up to the $44.00 strike for a net premium of $510.00 ($170.00 per contract). The cost-to-close is $670.00 per contract. I am bullish on the stock. Can you help?


Why does the math seem erroneous?

Did you find why I am puzzled? It’s in the very first sentence of John’s question. With share price at $40.26, the $38.00 strike is $2.26 in-the-money meaning that every option contract sold will have $226.00 of intrinsic value plus a time value component. That computes to $678.00 plus time value. However, John received only $434.00. The math tells us a story. John bought FIVE for $40.26 but didn’t sell the call at the same time. He waited and watched share value decline and then sold the option…had to be. Yes, this was confirmed by John.


Should we roll out-and-up?

This aspect is made easy by using the “What Now” tab of the Ellman Calculator:


covered call writing exit strategies

Rolling Out-And-Up with FIVE


The results of the spreadsheet calculations show a 1-month return of 2.61% for this strike. This means no chance of upside potential and no downside protection of the 2.61%. The breakeven is at $43.00. These calculations are based on the prices at the time John entered the covered call trade initially, not after he bought the shares at a higher price.



Exit strategies are critical to covered call writing and so members like John are on the right track examining and other choices. When we buy a stock specifically for covered call writing, it is best to sell the call option immediately after executing the long stock trade. There are times, of course, when the stock was already in our portfolio with a higher or lower cost than current market value. However, our trade decisions are always based on current stats and we should not be influenced by what happened in the past.


For more information on exit strategies for covered call writing

Complete Encyclopedia for Covered Call Writing- Classic version: Pages 245 – 302

Complete Encyclopedia for Covered Call Writing- Volume 2: Pages 243 – 272


Upcoming live events

1- January 26, 2017


Blue Hour webinar #4

“The Poor Man’s Covered Call”

Free to premium members

We will analyze the use of LEAPS options instead of buying to enter a covered call trade at a much lower capital outlay

This is a must-see presentation

2- February 27, 2017

Stock Trader’s Expo

Marriott Marquis Hotel, NYC

1:30 PM ET

Exhibit Hall Booth 208 (February 26th – 28th) … come say hi to the BCI

3- March 21st and 22nd, 2017

Two live Florida events (Fort Lauderdale and Delray Beach)

More information to follow


We encourage comments and questions regarding this article or any option-selling topic

Scroll down below this article and make your entry. Other members, myself or other BCI members are available to respond. It has come to my attention that some members were not aware of this posting area. For beginners, even the most basic questions are welcome…we all started in the same place.


Online 1-on-1 online coaching program

We are now offering mentoring sessions during the day. In the past years, these hours have been reserved for evenings. For more information click here:

Coaching program


We can negotiate with our online discount brokers

I received this email from Alan B after I suggested negotiating the high exercise fee charged by TD Ameritrade:

Hey Alan!

you not going to believe this but I called TD Ameritrade like you suggested. I explained to them that their assignment fee was the highest in the market, $9.99 stock trade and .75 contract with assignment fee of $19.99.

Right away he put in the paperwork to get stock to 8.95 and assignment fee crushed to $8.95!!! I should hear back from them Tuesday. I think they feel like they better hold on to people while they got them.

Please feel free to use my example on how to deal with crazy fees, thank you for your help.


Kudos to Alan for following up.


Market tone   

Thanks to a surge the last two months of the year, the S&P 500 ended up 9.32% for 2016. This is within the historical average for the stock market. The CBOE Volatility Index (VIX) moved up slightly to 14.05, still at historical lows.  This week’s reports and international news of importance:

  • Business confidence in Russia sank even further into negative territory in December, reaching -8 from -7 in November
  • Global business sentiment ended 2016 on a solid note. Confidence remains firm and consistent with an economy expanding at the high end of its growth potential
  • France has experienced the third drop in joblessness in a row
  • Japan’s labor force is approaching full employment, despite wages not growing rapidly. The seasonally adjusted unemployment rate was 3.1% in November, up from 3% in the prior month. starts rose 6.7% y/y in November. Both industrial production and retail sales ticked up in December
  • The Case-Shiller US house price index extended its October run as rising home sales pushed house prices higher. The 20-city composite index increased 5.1% on a year-ago in October, up 0.1% from the month prior
  • The Conference Board Consumer Confidence Index rose 4.3 points in December to 113.7, its highest level since 2001
  • Potential US home sales took a dip in November, plunging 2.5% on a seasonally adjusted basis to 107.3, defying expectations of a 0.3% increase
  • US wholesale inventories soared in November, putting the fourth quarter inventory build back on track. The November advance estimates show a 0.9% increase, following a revised 0.1% drop in October
  • Trade will likely be a drag on fourth quarter GDP growth, as November’s advance trade numbers showed a trade deficit of $65.3 billion in November
  • Initial jobless claims fell 10,000 to 265,000 in the week ending December 24th. This was in line with consensus expectations, and the prior week was unrevised at 275,000


  • Tues. Jan. 3rd: ISM manufacturing and construction spending
  • Wed. Jan.4th: Motor vehicle sales
  • Thurs. Jan. 4th: Weekly jobless claims and ISM non-manufacturing
  • Fri. Jan. 6th: Non-farm payrolls, unemployment rate, hourly earnings, foreign trade balance and factory orders

For the week, the S&P 500 declined by 1.31% for a year-to-date return of +9.32%. 


IBD: Market in confirmed uptrend

GMI: 6/6- Buy signal since market close of November 10, 2016

BCI: I am currently fully invested and have an equal number of in-the-money and out-of-the-money strikes. I would like to see more specificity regarding domestic and global policies for the new administration before taking a more bullish stance.


The 6-month charts point to a cautiously bullish outlook. In the past six months, the S&P 500 was up 6% while the VIX (11.44) declined by 10%.


Wishing you the best in investing and a HAPPY NEW YEAR,

Alan ([email protected]) and the BCI



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.

36 Responses to “Rolling Out-and-Up After Understanding the Math”

  1. Jay December 31, 2016 12:50 pm

    I just realized this is Saturday and we have this new comment string going! I posted a last follow up with a suggestion about how to may beget some breaks from our brokers at the end of the previous string that folks may benefit from reading.

    Looking forward to profiting and learning with our group here in the New Year! – Jay

  2. Barry B December 31, 2016 9:39 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 12/30/16.

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

    As you will see, the report this week has only three stocks that passed our screening process. We believe that this is a short term issue. The market dropped about 2% this week with the Put/Call Ratio over one (1.08). With the rapid market rise since the election, it is our opinion that some of the activity this week can be the institutions taking profits prior to year end. If you take a look at the charts for the stocks on this week’s list, you will notice that the primary reason for the stocks not passing our screening process was due to a failure in the “technicals” (MACD and Slow Stochastics), not the price trend.

    If you are employing an exit strategy this week and need to find a replacement trade, you can use the ETFs from the Wednesday night report. Alternatively, you have the option (no pun intended) to wait a day or two and possibly employ Alan’s “Hit A Double” strategy.

    From the entire Blue Collar Investor Team, we wish you and your family a Happy, Healthy, Safe, and Prosperous New Year. May 2017 be your best year ever!


    Barry and The Blue Collar Investor Team

  3. Roni January 1, 2017 10:33 am

    Very interesting article.

    I do buy stcks specificlly for one month call writing, and therefore I use the buy/write choice to save the extra comission, and almost always try to negotiate the strike, to get a better premium (as recomended in your books).
    This protects me from a drop in the the price of the stock, and also makes it easier to calculate the position gain/loss percentage, to decide which action to take at any specific moment of the contract duration.

    Roll out and up is above my risk tollerance.
    Roll out at the same strike is the most I can live with.
    If a stock was not called away, after 4 or 5 weeks, it may deserve another chance at the same strike, provided there is no earnings report before expiration.
    If a stock has gone up significantly, it may be ripe for a pull back, so I may roll out in the last day, but never roll up.

    It’s all in your books, but it takes years to understand.

    Happy new year to all !!!


    • Jay January 2, 2017 12:50 am

      Hey Roni,

      Hope you had a great Holidays.

      I get your point about risk and personal preference to not roll up since the lower our covered call strikes the greater our loss protection.

      As I tell anyone who will listen: the beauty of an options selling strategy is it’s flexibility and myriad ways to apply it!

      Last January was the worst annual start ever for the market. I am hard pressed to see that again. But equally hard pressed to see a tranquil month ahead. We are about to find out 🙂 – Jay

      • Roni January 2, 2017 9:38 am

        Thanks Jay,

        you are right about the myriad ways to apply the options selling strategy. It’s wonderful.

        I’m also very anxious to see what happens now.
        I’m fully invested, following Alan’s example, half ITM and half OTM but basically near the money.

        Take care – Roni

        • Jay January 2, 2017 12:51 pm


          I am glad I am not the only one with the New Year’s jitters and anxiety :)!

          Sine you are already comfortable varying the “moneyness” of your strikes writing some ITM and some OTM I suggest you keep the “roll out and up” tactic in your tool box.

          Where I have found it helpful is in situations where a covered stock I like is not far ITM on expiry Friday. I know I am about to lose it if I do nothing. But if the buy back cost of intrinsic value is not exorbitant and I can roll out to the next month at a higher strike to recover most or all of the closing cost giving it further upside running room why not do that on occasion? – Jay

          • Roni January 2, 2017 3:53 pm

            Thanks again Jay,

            I will watch out for such opportunities from now on.

            Sometimes I am too pragmatic, and I must be more open to change. It is part of the learning process.

            Roni 🙂

          • Jay January 2, 2017 5:40 pm

            Thanks Roni,

            I am no expert. But I doubt it is possible to be too pragmatic or too systematic when it comes to trading and investing. Only too emotional 🙂 – Jay

  4. Sal January 2, 2017 7:49 am


    How do dividends effect our covered calls. I am new to covered calls and want to use them on the stocks already in my account. Most give dividends which I want to continue. Do I still keep the dividend or does the option buyer get them?

    Thank you for your help.


    • Alan Ellman January 2, 2017 1:16 pm


      There are 2 key concepts to understand regarding dividends and covered call writing:

      1- The covered call writer, not the option buyer, captures the dividend as long as the shares are owned by the writer as of the ex-dividend date (prior to dividend distribution).

      2- There is an increased probability of early exercise of the option (and then our shares sold) the day prior to the ex-date. This is most likely if the dividend amount will be greater than the time value remaining on the option sold. Other factors are involved

      Here is a link to an article I wrote on this topic in 2015:


  5. Billy January 3, 2017 2:30 pm

    BCI Team,

    I hope this finds you well. After being a premium member for about 3 months now and sifting through ALL the materials and videos, I am starting to get a better grasp. I have been following you through the FREE stuff on Youtube etc. , for a bit, but after digesting the premium report, actually pulling the trigger on GRUB a few months back and profiting, I am ready for 2017. Have a question. In your tutorials you speak of “1 month CC” but have watch/running list EVERY week. If I select a stock say midway through the month, do I look at just 2 weeks to END a month, or would it still be a 4 week out kinda thing…or does it even matter. Understand what I’m trying to say here? Thanks..


    • Alan Ellman January 3, 2017 4:05 pm


      We do provide weekly reports to our members for 2 reasons:

      1- Some members use Weeklys.

      2- Frequently, we will need replacement securities for positions we close mid-contract. Having weekly reports allows us to make selections with the most up-to-date screens.

      My personal preference is to stay within the current contract month. This way, all my positions expire at the same time. To enter a trade for the January expiration, the last stock report only had a few candidates due to the market downturn at the end of last week…the fewest selections I believe since we started publishing the reports 10 years ago. Last week’s decline did occur on low holiday volume so I am anticipating many more choices for the next stock report. You can also look to the ETF Report to see if any candidates meet your goals. Remember, that we will be publishing a new ETF report tomorrow evening after markets close.


      • Billy January 3, 2017 5:59 pm

        Yes I noticed the lack of choices, and I was going to respond with something along that line to make sure I understood it correctly. So If I’m understanding, you and your folks try enter positions near the 1st of every month so as to keep a full month?

        • Alan Ellman January 3, 2017 6:05 pm


          You have the right idea with one important caveat. Option contract months and calendar months are different. The contract starts after the 3rd Friday of the month. So the January, 2017 option contracts began on December 19th, the Monday after the 3rd Friday of December. It ends on January 20th, the 3rd Friday in January. Contract months will last either 4 or 5 weeks.


    • Jay January 3, 2017 5:39 pm


      Welcome to our group!

      Because our strategies are so flexible if you use Blue Chips, the SPDR series of XL ETF’s or SPY/QQQ/IWM you can create your own “months” by looking out 4 or 5 weeks on any given options chain at any point in time. The volume and open interest will always be highest for the traditional 3rd Friday expiry but I create my own time periods frequently using the weeklies.

      For a growth stock like GRUB and some of the others on our Premium lists that do not have much option volume or weekly options I like to let them run after buying to hopefully have a positive position first. Then write options for the following month closer to the money for better premium since I already have a gain. Different strokes for different folks….

      If they go down I would have been better off buying and writing simultaneously. But if they make Barry’s list I take the chance they still have a little wind in their sails after I buy them before I sell calls :)! – Jay

      • Billy January 5, 2017 7:45 am


        That’s kind of what I thought. Thanks a lot.

  6. Yoko January 4, 2017 1:12 am


    Thank you so much for sharing a great amount of useful information. I’ve been learning covered call writing for 3 months and finally I’m ready to test the water.

    BCI recommends $35,000 to start, but I’m not comfortable to trade that much amount of money at the beginning.

    What I’ve been doing is just buy and hold in my Roth IRA account, so I guess I’m very scared!

    I appreciate if you can show me how to take a baby step!

    Thank you.


    • Alan Ellman January 4, 2017 3:38 am


      Your emotions are normal. I was also quite nervous about initiating my first option-selling trades but my confidence level increased in conjunction with an increase in my knowledge and experience and so will yours.

      You can get started in a more conservative fashion and with a lower investment using exchange-traded funds (ETFs). These will give you instant diversification and so you will be required to purchase fewer underlying securities.

      Here is a link to an article I published on this topic:

      I use this approach in my mother’s portfolio and is a good way to get started.

      Both versions of the “Complete Encyclopedia for Covered Call Writing” have chapters dedicated to ETFs.

      Take your time and welcome to our BCI community.


    • Jay January 4, 2017 5:39 pm


      We have all been where you are now. So if I may offer an add on to Alan’s always great answer since it touches on Steve’s question below also I hope you do not mind.

      If I were getting started with covered calls and cash secured puts I would use QQQ as my baby step until I got the hang of it. It is more volatile than SPY but less so than IWM, has instant liquidity and penny bid ask spreads.

      Please remember the risk is always in the security we choose and never in the covered call or cash secured put we write. So it is good to start with one that has a little bit of kick to it like QQQ but will not crater at any moment like an individual stock might.

      Option selling may not seem worth the bother currently since the VIX is depressed, premiums are low and the indexes are in a nice uptrend until at least until the inauguration when reality sets in 🙂

      Being an options seller is profitable and fun. If you ever feel like you are getting ahead of yourself slow down and take a breath. Plus know there are always friends here willing to help. – Jay

      • Yoko January 5, 2017 7:48 am

        Thank you for your responses.
        I look into ETF, which I never considered as one of my opinions.
        I’m so excited to try BCI way!

  7. Steve January 4, 2017 9:46 am


    If you’re just starting your portfolio, is it advisable to go in with one stock at a time in terms of sector and capital allocation,where you haven’t figured all your stocks yet ?
    Hope you understand the question

    • Alan Ellman January 4, 2017 10:51 am


      Once we have decided on a cash amount we plan to allocate to our covered call portfolio, it is best to create an overall plan. For example, a $50k portfolio will probably have 5 different stocks in 5 different industries. An ETF portfolio of $15k may have 2-3 different ETFs. A big-picture plan is preferred over a single stock selection.


  8. Alan Ellman January 4, 2017 5:11 pm

    Premium members:

    This week’s 8-page report of top-performing ETFs and analysis of ALL Select Sector Components has been uploaded to your premium site. The report also lists Top-performing ETFs with Weekly options.

    For your convenience, here is the link to login to the premium site:

    NOT A PREMIUM MEMBER? Check out this link:

    Alan and the BCI team

  9. John January 5, 2017 3:53 am

    Would you have any final return goals per month (as you do for the initial returns), or is this really based on a yearly return goal?(like 15%,etc?)
    Should all us BCI investors strive to achieve at least a certain margin – like 5%, over the benchmark S&P500 performance for every single trading year, and whether the market rises or falls over the course of each year too?

    I had also remembered you once said that you base your strike price from the initial returns, and the more concern you have then the closer to 2% you go down to. But is the 2% based on the ‘bid’ quoted price, or from the price you hope to receive when playing the B/A spread?
    Thank you.

    • Alan Ellman January 5, 2017 2:52 pm


      Final returns can be impacted by several factors, the overall market performance being the main one. Certainly, the skill of the investor and personal risk tolerance and goals play roles as well. Whichever category we fall into, we should beat the overall market every year. This does not necessarily mean that in extreme bear markets, we make money. I have archived on this site on many occasions that my portfolio was down 15% in 2008…but I beat the market (not that I felt good about losing money!).

      I view the calendar year to measure my success rather than a week or a month.

      The percent I demand for initial returns is based on the “bid” price or higher if I was able to “negotiate” a better price…therefore based on actual premium received.


  10. Jim January 5, 2017 7:46 am


    News today is theorizing that Ford will again this year offer a Special dividend.

    Ford seems a good stock to hold for writing covered calls, in my newbie opinion. (I have seem the MotFool guys suggesting F as a stock to use.)

    When and if a dividend is announced, will you offer a suggested strategy for covered calls on Ford?



    • Alan Ellman January 5, 2017 2:12 pm


      Special 1-time dividends usually infer a cash-rich company. Ford has been an under-performer but is showing positive technical signs so it may turn out to be a good candidate for our covered call portfolios. Two things to keep in mind:

      1- On the dividend ex-date, the share price will decline by the dividend amount (no free lunches!)
      2- The strike prices of the options will be adjusted down by the dividend amount so there will be no wins or losses in this regard but we must ALSO understand what is going on.

      When I have some time, I’ll have a close look and perhaps write a blog article or produce an Ask Alan video on this topic.


  11. Mike January 5, 2017 1:59 pm


    When using the 20/10 rule to buy back an option, what factors would you use to decide the next step? For example, what would lean you towards waiting for the underlying to rise in value to hit a double vs just rolling down?


    • Alan Ellman January 5, 2017 2:58 pm


      After buying back the option, a decision to roll down or look to “hit a double” is based on the time remaining to expiration and the performance of the stock compared to the S&P 500. I will favor “hitting a double” earlier in the contract and rolling down later in the contract especially if it significantly under-performing the overall market.

      If you have the classic version of the “Complete Encyclopedia” see p[ages 256 – 261 for more details with specific examples.


      • Roni January 6, 2017 1:47 pm

        Hi Alan,

        Re 20/10 rule, I have a specific example today, right now :

        On Dec 23, I bought 200 ALGN @ 98.49 and sold 2 ALGN 01/20/2017 100.00 C for 1.74.
        Bought back calls yasterday for 0.35 = 20%
        ALGN is under-performing the overall market.

        Now I’m trying to decide :

        Sell the shares and take the 3% loss ?
        Roll down to the 95.00 Jan 20 calls for 1.30, to mitigate the loss ?
        Do nothing, and wait for a double ?

        My gut says : Liquidate, take the 3% loss, and invest the money in a better trade.

        As they say, “the best loss is the first loss”.

        Happy 2017 – Roni

        • Jay January 6, 2017 11:34 pm

          Great trade, Roni!

          Let’s step back for a moment and think about what you just did. You bought 200 shares of a great stock. You sold 2 OTM contracts on it at $1.74 a share and then closed those contracts for 35 cents netting $1.39 a share of real closed income on a $98.49 stock for a 1.4% cash return in your account in two weeks. And you still own the stock! You can do it again and again

          Now, nothing is perfect. But a pet peeve of mine is when I read articles elsewhere by those who live and die by Dividends and pooh pooh options selling in addition. It should be the reverse: I do not pooh pooh dividends in addition to my options premiums :).

          In my opinion since you now own 200 shares of ALGN free and clear let at least part run for the rest of this expiry. It closed at $94 right at it’s $50 day MA today. There is additional support at $90. If it bounces at either of those levels sell one contract and leave the other 100 shares open. Small risk in holding 200 shares of a quality company instead of trying to time them perfectly.

          It may be down at the moment but it clobbered it’s indexes last year.Healthcare in the US is a political football. But ALGN has a great business model. I bet it beats XLV again this year. Jay

          • Roni January 7, 2017 1:25 pm

            Thank you Jay,

            but I got cold feet and sold the shares for 94.00, 3.3% loss.

            The lesson is : Be more confident next time.

            Roni 🙁

        • Alan Ellman January 7, 2017 7:06 am

          Roni and Jay,

          Great commentary. ALGN has been a significant money-maker for many of us in the BCI community in 2016. The chart below reflects this as well as the fact that it has under-performed (red arrow) the past 2 weeks.

          From a position management perspective we must evaluate where in the contract we are. By buying back the options (nice job) you are in a position to take action to mitigate losses or enhance gains. With 2 weeks remaining until expiration, time value is eroding rapidly. This means that if ALGN does not move up in price significantly in a day or two, “hitting a double” is a less likely course to pursue. We would then turn to rolling down which should generate an additional 1% or selling the stock. This decision can be based on price performance early in the week unless you view this stock as a long-term hold.



          • Roni January 7, 2017 1:31 pm

            Thank you Alan,

            but I sold the shares 15 minutes before the close, at 94.00, taking a 3.3% loss.

            The main reason was that I did not want to worry about it the whole weekend.

            Roni (the chicken)

  12. Richie January 6, 2017 2:30 am


    In reading many of your articles, I have found that sometimes you indicate that after selling a call one should immediately set a limit order to buy it back at the 20%/10% limit. Is this something that one would use regularly or only with certain situations? I know that you want us to have control and I am confused as to whether this is something you do. Thanks and Happy New Year! Richie

    • Alan Ellman January 6, 2017 7:45 am


      It is essential to use the 20/10% guidelines but not essential to immediately set a limit order to buy back the option. Doing so is especially useful for those who work a Monday-to-Friday 9-5 job and cannot regularly check stock/option values. By immediately setting the limit orders, the option buyback is automated.

      For those who can regularly check our positions, setting the limit order is not essential but can still be useful.