Setting Our 20%/10% Guidelines After Rolling an Option Out or Out-And-Up

Rolling-out is a covered call writing exit strategy we frequently use when a strike is expiring in-the-money (ITM) and we want to retain the underlying shares for the next contract cycle. After closing the short call in the current month prior to rolling, a new trade with the same security is set up in our trading log for the next contract. This article will demonstrate how to set up our 20%/10% guidelines for the rolled-out trade. Since the concept is a bit complex, I will create a hypothetical example with nice even numbers.

Proposed BCI trade

• 3/21/2022: Buy 100 x BCI at $48.00
• 3/21/2022: STO 1 x 4/15/2022 $50.00 call at $1.50
• 4/15/2022: BCI trading at $52.00 on expiration Friday
• 4/15/2022: BTC the 4/15/2022 $50.00 call at $2.10
• 4/15/2022: STO 1 x 5/20/2022 $55.00 call at $1.75

Results of the 4/15/2022 contract before rolling

• Option profit: $1.50 per-share
• Stock unrealized profit: $2.00 per-share ($50.00 – $48.00)
• Total profit %: $3.50/$48.00 = 7.29%

Rolling entries into the next contract cycle

• Value of stock at rolling (ITM strike): $50.00
• Net option credit or debit (debit in this hypothetical): -$2.10 + $1.75 = -$0.35
• Investment per-contract: $5000.00 (value of stock x 100)

BCI pre-rolling final results

BCI: Final Initial Contract results

The final result for the current contract cycle is a cash (partially unrealized) profit of $350.00 or 7.29%. This result is partially unrealized because the shares have not been sold.

BCI rolled-out-and-up trade as a standalone trade (if there was no trade the previous contract cycle)

BCI: Rolled-Out-And-Up Trade for the 2nd Contract Cycle Only

The $1.75 premium resulted in a 20% guideline of $0.35 and a 10% guideline of $0.18. This does not factor in the value of our shares pre-rolling ($50.00, the ITM strike) and the cost-to-close the current month contract ($2.10).

BCI combined roll-out-and-up trade

BCI: Rolled-Out-And-Up Trade Factoring in Both contracts

Notice that when factoring in the cost-to-close the previous contract short call, the net option premium is actually a negative number, rendering the 20%/10% guidelines not applicable.

Discussion

Establishing our 20%/10% guidelines after rolling an option requires 2 sets of calculations. The first has to do with initial time-value returns which factors in practical value of the underlying at the time of the roll ($50.00 in this hypothetical) and the net option credit or debit (-$0.35, in this hypothetical). The second data set reflects the actual time-value premium received for the rolled-out trade without factoring in the time-value cost-to-close. The post-rolling 20%/10% guidelines are based on the latter contract data, not the combined data ($1.75, in this hypothetical). In this hypothetical, the 20%/10% guidelines are $$0.35 and $0.18.

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Covered Call Writing: Multiple Applications Based on Current Market Conditions

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Selling Cash-Secured Puts: Detailed Start-to-Finish Six-Part Program*

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Covered call writing is a low-risk option-selling strategy geared to generating cash flow with capital preservation a key requirement. This presentation will demonstrate how the strategy can be crafted to benefit in all market environments. Market situations highlighted are:

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Portfolio Overwriting

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Our buy-and-hold portfolios in non-sheltered accounts are generating 8% – 10% per year. Can we increase these yields by selling stock options while, at the same time, dramatically decreasing the probability of our shares being sold to avoid potential tax implications? The answer is a resounding “yes”.  Portfolio Overwriting is a strategy that can benefit millions of investors seeking to enhance portfolio returns using a low-risk covered call writing-like strategy.

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