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Rolling Covered Calls Up and Out

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As the equity markets continue to grind higher, investors may have covered call options that they previously sold which are approaching expiration – as well as approaching being at (or in) the money.

Selling calls on a one to one ratio with shares you already own is a great way to earn extra income on shares in a stock that seems to be trading in a predictable range, and if the stock rallies through the strike of the calls that you’ve sold before they expire, the stock is called away, but not only have you sold it at a profit, you also collected the premium on the calls, adding to your profits.

But what if you didn’t really want to sell the shares?

You can do what professional traders do and roll the calls “up and out.”

Here’s an example:

In May of 2019, you recognized that Apple (AAPL - Free Report) was trading in a tight range between $190 and $205/share. You as the owner of 500 shares decided to make a little bit of extra income on the holding during the traditionally slow Summer season and sold 5 calls that expire on September 20th with a strike of 225. You collected $5/each in premium for a total credit of $2,500.

For most of the summer, this looked like an extremely sensible trade as AAPL stayed in that tight range and traded at extremely low volatility, bouncing back and forth between $195/share and $205/share, without ever threatening a serious breakout in either direction.

Here is the risk profile for that trade back in May:

The calls you sold were decaying in value every day and it looked like you would collect the entire premium.

In September, APPL started moving to the upside. The rally has continued ever and AAPL shares closed at $222.77 on Wednesday.

The calls you sold are now 29 days from expiration and $225/share certainly seems within reach, in which case you’d be selling the 500 shares at $225. Considering the stock was trading around $190 in May when you executed the option sale, this will still have been a very successful trade. You will have made $35 – or 18% in five months - on the stock, plus an additional $2,500 in option premium.

Not too bad, right?

Except it’s possible that the recent rally has shown you that AAPL shares still have the legs to run. There have been 11 upward earnings estimate revisions in the last 60 days and the 2019/2020 iPhone upgrade cycle look more promising than last year’s, with several new features promised as well as a price cut on the base-level iPhone. Maybe you’re not ready to give up on AAPL yet, even though you’ve had an impressive recent gain.

Roll the October calls up and out.

In a single spread trade, you’ll buy back the October 225 calls and simultaneously sell the January 245 calls.

Recent price for those options were:

                                Bid        Offer

OCT 19 225 Call        $4.50        $4.60

JAN 20 245 Call         $4.40        $4.50

Because you’d be entering the order as a spread, you can most likely execute the trade inside the bid/ask spread for “even” – meaning no credit or debit - or you might possibly pay between 5 and 10 cents.

Here is the risk profile of the updated position today:

You’d then have basically the same position as you had when you started, you’d still own the shares and you’d be short 5 calls against it with 4 months left until expiration – which is before the expected earnings announcement at the beginning of February.

The p/l profile is now shifted $20 higher and out in time to reflect the date and strike of the new position.

Up and Out.


Want to apply this winning option strategy and others to your trading? Then be sure to check out our Zacks Options Trader service.

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