Am trying to understand the strategy for using a poor man’s covered call. Using TOS Paper Money’s Thinkback, I: -- Bought SPY Dec 2014 LEAP call 100 for 91.54 on May 28, 2014 -- Sold SPY Jun1 2014 (weekly) call 191.50 for 1.125 on same day -- Closing price of underlying on May 28, 2014 is 191.38 Moving Thinkback to June 6, 2014 (expiration date of Jun1 weekly), the prices are now: -- Underlying 195.375; LEAP 95.515; Short Jun1 weekly call 4.005 So the short call is now ITM and will be assigned. To avoid having the short call assigned and the LEAP exercised, I am told I should roll the Jun1 weekly. But the short call will have to be bought at 4.005, yielding a -2.88 loss on the Jun1 short call. By rolling to the next week, I will also receive 0.85 credit for selling the Jun2 call at 195.50 strike. Thus, on this date of June 6, the total change in capital since May 28 is the -2.88 loss on buying back the Jun1 short call, the 3.975 gain on the long LEAP and the 0.85 on selling the new Jun2 short call, for a total gain of 2.975. (The gain on the LEAP is, of course, unrealized.) What I don’t understand is why I should take the -2.88 loss on the short call? If I simply let the short call expire, I avoid taking a loss on that. When the Jun1 short call is assigned, I can sell the LEAP for 95.515, buy 100 SPY shares for 195.357 with cash (I will need to add $10K to the proceeds from the LEAP sale) and still have a gain of 3.975 from the LEAP. The 100 shares of SPY will be called away when the Jun1 call is assigned. I can then re-purchase the LEAP at 95.515 from the sale of the SPY shares (ca. 19,537). I can then sell the Jun2 short call for 0.85. So my total gain is 3.975 + 0.85 = 4.825, as opposed to the 2.975 that I get above by rolling the short call. And I have the same resultant position: long the LEAP and short the Jun2 call. So what am I missing?
When you roll the call, it's a different trade than if you close the whole position out. In the first, you are saying that you still want to have a covered call (even though the last one didn't make money). In the second you are saying that you don't want to have a covered call position on the books. The loss on the roll is offset by the gain on the LEAP. The market doesn't differentiate between realized and unrealized gains; though you may have to.