Covered call writing calculations should be as accurate as possible so that we can assess the success and feasibility of our trades. When we roll in-the-money (ITM) options out-and-up there is frequently an option debit which, on first glance, may make the trade appear to be a losing one. However, by factoring in the impact that rolling out-and-up has on our stock value will frequently shed a whole new light on these calculations.

 

Real-life example with Five Below, Inc. (NASDAQ: FIVE)

  • 5/21/2018: Buy 100 x FIVE at $76.19
  • 5/21/2018: Sell 1 x June 15th $75.00 call at $2.86
  • 6/15/2018: FIVE trading at $102.09
  • 6/15/2018: Buy-to-close the June $75.00 call at $27.50
  • 6/15/2018: Sell-to-open the July 20th $105.00 call at $2.80

Since an ITM option was sold for the June contracts, the maximum return was realized and now we must decide if rolling is a good choice. We will focus specifically on rolling out-and-up. On first glance, we see a huge option debit of $24.70 per-share ($27.50 – $2.80) … no way!

But what if we also factored in the impact rolling has on share value. Once we close the June short call, our share value moves from $75.00 (our option obligation to sell) to $102.09 (current market value). That represents a credit of $27.09 putting the rolling decision back into consideration.

 

Entering the information into the “What Now” tab of the Ellman Calculator

 

covered call writing calculations

Rolling Calculations with The Ellman Calculator

 

  • The brown cell shows the cost-to-close the June short call
  • The green cell shows the premium generated from selling the July short call

 

Factoring in both the short call and long stock positions after rolling out-and-up

 

rolling out-and-up calculations

FIVE: Final Rolling Calculations

 

  • Brown cells: Option credit
  • Yellow cells: Option debit
  • Purple cells: “Bought-up value of FIVE by closing the June short call
  • Red arrows: Net initial time value + share appreciation initial profit

If the initial return on option + share appreciation of 3.14% with an upside potential and possible total return of 6.96% meets our goals, rolling-out-and-up should be given serious consideration.

 

Discussion 

When we roll ITM options out-and-up, we must factor in the unrealized share appreciation resulting from closing the initial short call. This will give us a more realistic overview as to how the trade will impact our portfolio net worth. Once the position is rolled, we immediately enter position management mode.

 

Your generous testimonials

Over the years, the BCI community has been incredibly gracious by sending our BCI team email testimonials sharing stories as to what our educational content has meant to their families. Moving forward, we have decided to share some of these testimonials in our blog articles. We will never use a last name unless given permission:

Alan,

I have taken your books out of the library and have listened to your videos. I am beginning a journey with you. Scary and exciting as it is all new. I love your clarity.

Alison

 

Upcoming event

July 22: Chicago Traders Expo

All Stars of Options

1:30 – 2:15

Hyatt Regency McCormick Place

 

August 15, 2019:San Francisco Money Show

Master Class

9:15 AM – 12:15 PM

Workshop

6 PM – 6:45 PM (subject to time change)

 

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