Rolling A Covered Call Option
Rolling a covered call is a strategy where you buy back the call that you sold and sell another call option – usually with a different expiration date – at the same time.
In this article, we will discuss the Why, When, and How:
1.) Why would you roll a covered call?
2.) When Should You Roll a Covered Call?
3.)How To Roll A Covered Call?
-Rolling up and out
-Rolling down and out
4.) Can you roll a covered call forever?
Covered Call Strategy
Let’s briefly review the “Covered Call Strategy”:
A covered call is a strategy where you sell a call option against your existing stock position. The idea is to collect extra options premium in addition to making money on the stock.
Here is an example:
I sold Put Options on Camping World (CWH) with a strike price of 37.50, and on Friday, June 18th, I got assigned 2,700 shares of CWH at a price of $37.50:
On Monday, June 21st, I sold covered calls against my existing position:
For every 100 shares that I own, I sold 1 call for $0.50.
In order to create a covered call position, I sold a total of 27 call options expiring on June 25 and collected $1,350 in extra premium. Not bad for 4 days 🙂
Now 1 of 2 things will happen:
1. On June 25th, the stock price of CWH will trade below 39. In this case, the call options expire worthless, I keep the premium and can sell more calls that expire the next week. OR…
2. The stock price of CWH will trade above 39. In this case, the stocks are getting “called away” at 39. In this case, In addition to the $1,350 in options premium, I’m making another $1.50 per share = $4,050. So my total profits for this trade would be $5,400.
That’s a pretty sweet profit, so why would you mess with this trade?
Why Would You Roll A Covered Call?
There is one main reason for rolling a covered call position, and that’s simple:
You should roll out your covered call when you have the opportunity to make more money by rolling than holding onto your option.
Let’s continue our example.
Below is the 5-minute chart of Camping World (CWH) on Friday, June 25th:
As you can see, the stock price of CWH was trading above 39, so my stocks would have been “called away” and I would have made $5,400.
So why did I decide to “roll out” my covered call position?
Should You Roll Out A Covered Call Position?
On Friday, June 25th, the July 2nd call option with a strike price of 39 was trading at $1.60.
At the same time, I could buy back the June 25th call option for $1.00.
Since I sold the June 25th call option for $0.50, I would lose $0.50 per option.
BUT I would collect $1.60 in premium for NEXT week’s call.
So the net is $0.60 per option or $1,620 for my 27 options.
When Should You Roll a Covered Call?
If I would have done nothing, I would have made $5,400.
By rolling the option, I can collect another $1,620 in options premium.
And again, there are only 2 possible outcomes on Friday, July 2nd:
1. If the stock price of CWH is below 39 at Friday’s close, I would make an additional $1,620 in premium. So the total premium collected would be $1,350 + $1,620 = $2,970 – no matter what.
2. If the stock price of CWH is above 39 at Friday’s close, my stocks get called away, and since I bought them for $37.50, I will make $1.50 per share = $4,050. This is in addition to the $2,970 in premium for a total of $7,020 on this trade.
In a nutshell:
Rolling this covered call will bring me an additional $1,620 in profits.
Rolling And Subjective Considerations
So what’s the downside?
The risk is that Camping World drops below the price that I was assigned at, i.e. $37.50.
Because in this case, I would lose money on the stock.
But as long as I am “somewhat” bullish on the stock, I can keep rolling the call and collect more premium every single week.
This will increase my overall profits on this trade week after week.
How To Roll A Covered Call?
Rolling can be done at any time before, or on, expiration day.
For me personally, I usually only consider it on the expiration day.
And there are 2 ways how you can roll:
1.) Manually: In this case, you first buy back the option that expires this week by using a “buy to close order,” and then sell the call option that expires next week.
2.) Let your broker do it: Many brokers provide a “ROLL OPTION.” In this case, you are selecting the minimum price that you want to NET after rolling. In my example above, it was $0.60.
Here’s a screenshot from tastyworks:
As you can see, right now, I could roll the 39 call option for Camping World to next week for a $0.40 credit.
When you select the same strike price and “just” roll the expiration date, this is a simple “roll-out.” You keep the same strike price but use a later expiration date.
Rolling Up And Out
Sometimes, it might make sense to “roll-up” your call option.
In our example, I could choose to roll-up from the 39 strike price, into the 40 strike price.
Let me show you a specific example:
Right now, I could buy back the 39 Call expiring July 2nd for $1.70:
And then I could sell next week’s Call with a higher strike price of 40 for $1.50.
So my net debit would be $0.20, or $20 per option.
Since I have 27 options, I would have to give back $540 of my premium.
BUT… if CWH rallies above 40, I would make an additional $1 per share = $2,700. In this case, I’m giving up $540 of my premium for the potential of making $2,700.
In a nutshell, I make less money in options premium, but I would collect more money if the stock price rose above 40.
Rolling Down And Out
If I am no longer bullish on the stock, I could roll my call option “down and out.”
Here’s an example:
I could buy back the call that I sold for $1.60 for $1.70.
So I would lose $0.10 on this call, or $270.
BUT…. I could sell the call option with a lower strike price of 38.50 and collect $2.50.
Since I’m selling 27 options, I would make 27 * $250 = $6,750.
The only downside:
If CWH stays above 38.50, I’m “only” making $2,700 on the stock:
I bought the stock for 37.50 per stock and will be called away at $38.50. That’s $1 per share and $2,700 for the whole 2,700 shares.
Total for the trade:
- $1,350 from the initial Call
- – $270 from buying back the July 2nd Call
- $6,750 from selling the July 9th Call
- $2,700 from the stock IF CWH closes above $38.50 on Friday
- $10,530 total profit
Can You Roll A Covered Call Forever?
The short answer: YES.
BUT…. you MUST have your bookkeeping under control to keep track.
Because whenever you roll a call option, you might make or lose money on the call that you are closing early. So make sure to account for these losses.
As you can see, rolling calls can be VERY beneficial IF you know what you’re doing.
And if you would like to know how I got paid $1,350 to buy these shares, then click on this link to watch a video where I explain it in detail using “The Wheel Strategy.”