when to ROLL up/down..... I have a question just a basic one because I under stand there are many factors at work, and in play with trader objectives but my question is this ... is there any basic rule of thumb .. when to roll up a position? for example... Abc at 50.00 sold abc covered call at 55 strike ... at the market is approaching 55 ... when would you want to buy the 55s and sell 60s? as the 55s are getting hit in the under lying,? prior? .. or after...???? Just some broad feed back because i know time is also a factor as well as vol etc... but just as a basic answer... what goes thru ones mind .. when a roll should be done... thanks any constructive information is much appreciated .. (and you don't have to tell me there is much more involved I understand this .. i am speaking in generalities) Thanks in advance. R.D.
depends on where you feel the stock's going to go. If you think the stock's going to go under 55 by expiration, then you just hold tight, if you think the stock is going to keep going up, you don't roll it up, you close it out. If you think the stock is going to break 55 and hold above 55, what you can do is cover your naked call, and buy the underlying (essentially reversing your position into a naked put, but w/ only 1 commission).
let me pre phrase this .. WHEN IS THE OPTIUM TIME TO DO A ROLL ... meaning when is the best point price wise to roll up!
The best time to roll is when you are going to pay the least for buying back the short call and get the most for selling the next call. Since you don't know when that point will be, the best thing to do is to monitor the spread b/t the two months. If it's widening, then time decay is working its magic. If it's narrowing, then that usually means that the underlying is moving away from the strike and you must choose whether to roll or close the entire position. There are no guarantees that this is best time to roll since the future is unknown. But in the present, it is.
The optimum time for the roll would be right before the stock moves up, since the closer to the money option moves up more then the further to the money option. However, if you could predict this, you'd be closing out the position instead of rolling it. I honestly don't see the point in vertical rolling.
"The optimum time for the roll would be right before the stock moves up, since the closer to the money option moves up more then the further to the money option." If i am selling a call against this position and buyingn another ie a roll ... wouldnt the pricing be better once the underlying is actually at 60 ... ie selling with theta and vega gamma? .. collecting all that in prem. your idea of rolling before the price, or before the move ... ummm care to explain... ? lets say .. we are only looking at calls ... pricing at 55 and 60 calls ... at what point .... do we hit an equaliberiumm price .. meaning .. when does the 55 purchase and the 60 call sell .... reach its max .. as the underlying is moing up 55? 56? 57? 58? 59? etc etc etc....
Out-of-the-money calls tend to be "bid up" by speculators. When the market rallies to bring those calls to at-the-money, speculators tend to sell them and "reach" for other out-of-the-money strike prices. That selling pressure can diminish the implied volatility greatly. You can give consideration to "rolling up" when your short-call is at-the-money and selling the next out-of-the-money strike more advantageously if you believe that logic.
The easiest way to clarify what you want is to think in basic terms. 1. You want to roll up your short call in the same month (to keep it simple). 2. thus you want to buy back the short and sell a higher strike, iow you want to buy a call vertical 3. ask yourself 'when is a call vertical the cheapest?' 4. answer: depends on where the spot price is and how much time to expiry (volatility not so important because fairly much neutralised in the spread). It should be obvious by now that the 'best point to roll' is before the underlying starts to go up. The longer you wait and the further the underlying moves up the more expensive your call vertical (roll) will be to purchase (although there is some time decay working in your favour but often not enough to offset the rise in underlying). The other point you didn't mention is which call to roll up to. A: Depends on where you think the stock price will get to. Practically speaking, a reasonable guide is to roll when the short gets to atm and you believe it will continue to climb. db