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

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

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.

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