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Covered Calls - Should I Roll Up and Out?

Posted by Pete Stolcers on June 5, 2009

Option Trading Question

My question is about the appropriate exit strategy at expiration of a covered call I've written. When is it advisable to let an option get exercised; to roll straight out by purchasing the option at the same strike and selling another call farther out in time; or roll up and out. A few months ago, I sold an option on April 120 covered call. The premium at the time was about $7.50/share. I let the option become exercised at about $160, I think. Since it was so deep in the money, I decided not to roll up and out. But why would it have been a bad idea just to roll the option out to a later date, say July and thereby pocket another another premium? I don't recall exactly what were the option premiums for the April 120s and the July 120s, but there was a profit to be made.

Option Trading Answer

When I do a covered call (buy-write) my opinion determines the strike price and the expiration month. For instance, if I believe the stock is going to run up, I will sell an out-of-the-money option to give it room for appreciation. If I feel the stock might grind higher, I will sell an option closer to the money to give myself more protection. In either case, I try to put myself in a position where I will be happy if I get assigned.

If you really like the stock and you think it is going to rocket, don’t do a covered call - just buy call options.

I don’t like to buy in my covered calls for the same reason I don’t double down in Black Jack when I have two Jack’s showing. Why split a winning hand? Let the stock get called away and reevaluate. If the stock still looks strong, consider another covered call.

The only exception might be a very strong stock in a market that has just staged a major breakout above resistance. If I feel like the probability of the stock and the market moving up is very high, I might consider buying in the short call and waiting to sell a higher strike once the move stalls. I need to see a trend in both the stock and the market. Again, this might only play out 2-3% of the time.

In your case, the option was so far ITM that you could not have rolled the position to anything OTM for even money. If you did the roll for anything less than even-money, you would risk having a losing trade if the stock pulled back. You had a great trade, be happy with it and don’t second guess yourself. Start looking for the next winner.

Getting assigned on a covered call is a great thing. The stock did just what you expected and you made money. Try not to mess with it. 

Option Trading Comments

  • On 05/11, Mark said:

    A follow-up question to “Covered Calls - Should I roll up and out?”

    This particular question dealt with an ITM position and rolling it out and/or up.  I would like to add to the scenario and get some advice.

    What if I like the equity and it pays very good dividends?  For example, I sell a longer term DITM option to reduce may cost (and risk) and at the same time collect the dividends.  I would get a nice ROI plus big downside protection.  However, before the expiration date, I would like to rollout at the same DITM strike price thus further reducing my cost while collecting dividends.  Is this realistically possible and wouldn’t this be wise for this particular stategy?

  • On 05/12, Pete Stolcers said:

    You don’t want to sell a deep ITM call option because you run the risk of being assigned, particularly just before the dividend is paid.

    A collar would be more effective if your objective is to collect the dividend. In this stragtegy, you buy the stock, sell an ATM call and use those proceeds to purchase an ATM put. The position is very hedged and your return will be fairly fixed. If you want to leave room for capital appreciation and take on a little more risk, sell an OTM call and buy an OTM put.

  • On 09/15, Steve said:

    Do you collect dividends when you own call options?


  • On 09/15, Mark said:

    You receive the dividend if you own the underlying stock, not the option.

  • On 09/30, bruce said:

    I sell covered calls in aapl for xtra income. If I sell an in the money call for april can I have the stock assigned before the expiration date in April?

  • On 07/19, Mike Roderick said:

    If I am not trying to capture a dividend, is there any problem with selling DITM covered calls as a conservative strategy?  If the call premium that I collect covers my commissions plus about 1%, then it seems that an early assignment would give me my 1% and allow me to use the stock money elsewhere.

  • On 07/20, Pete Stolcers said:

    There is not a problem with the strategy at all.

    Just make sure the majority of your time is spent researching the underlying stock. You don’t want to get blindsided by news.

  • On 04/23, Nicholas Pyle said:

    I am confused.  I thought that when a covered call expires in the money the option holder executes notice and the stock is delivered at strike price for processing fee.  My broker insists that in order to get out of an in the money option he has to buy back the option and sell the stock at market?  What is the procedure and this broker being truthful?  It seems the net of his actions is small and the commissions a lot.  Please advise?  Thank you.  Confused in DC….

  • On 04/27, Pete Stolcers said:

    You are correct.

    The buyer of the option can exercise the call or if he fails to, the Options Clearing Corp (OCC) will do that for him if it is more than a few pennies in the money. Then the OCC will look at the short open interest in all of the options and assign each brokerage firm accordingly. Your account will be flat. The options will have been assigned and your stock will be called away at the stike price. The brokerage firm simply dilivers your sahres via the DTC (Depository Trust Company). There is usually one fixed fee for that transaction ($10) although some firms charge a per share commission.

    If you are willing to have your stock called away, there is no action required. The option is either assigned or it expires worthless.

    Your account rep is full of BS and does not understand the process. You do not have to buy back the option and sell the stock. This is good for the broker since he makes two commissions instead of one. I would complain and I would change brokers.

  • On 01/27, mkline said:

    I have portfolio of low beta big blue chip stocks with a low cost basis which I plan to own for many years. I have been writing covered calls against this portfolio.

    By question is that once the stock price rises above the strike price, are there any deicsion rules regarding the best time to roll up to a higher strike price?

  • On 01/28, Pete Stolcers said:

    If this was a trade and you bought the stock and sold the calls at the same time, let it go through assignment. When you put the trade on, you would have been happy with this result and this will force you to take profits. Once the trade has run its course, you can decide to get back in an possibly do a buy write.

    The strength of the stock, the group, the sector and the market would play a role in weather or not you should roll up and out. I have found that sticking to the original game plan works best. The exception would be a massive market breakout or a material news event for the company where the earnings would be favorably affected for years to come.

    I do address this issue in an extensive online course called Covered Call Writing - The Right Way!

  • On 02/01, Anthony Wilson said:

    I sold covered calls JAN-13 $5.00 CALL ( 20 contracts) now I want to get out of this covered calls since I feel Citigroup has potential to be over $5 by Jan 2013.
    What are my best options ?

  • On 04/08, Gerald Lakin said:

    I have rolled up a covered call from March to April expiration on my silver etf AGQ. I have a 175 call with a purchase price of 41.50 and my original stock purchase of covered shares is 141.

    The stock has exploded to upside and is currently at 263.

    What are my options when a covered call gets blown through. Should I sell otm options in later months?

    I was considering selling otm options in later months and also purchasig puts to protect downside and lock in profit.

    Please help.

    Thank You

  • On 04/11, Pete Stolcers said:

    When you write a covered call, you hope that the underlying asset moves higher. If you get assigned, you max out the profit potential of the trade.

    I don’t like messing with the position when this happens. Let the stock get called away and evaluate the stock as if it were the first time you are looking at it.

    You maxed out. Be happy, move on and don’t think about what could have been.

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