Rolling up covered calls

Discussion in 'Options' started by droid17, Apr 18, 2009.

  1. droid17


    Hi all :)

    I am pretty new to options trading, and have a question about the risks / benefits of rolling up my covered calls. Yesterday I had 50 contracts on the BAC apr 10. I own 5000 shares at 5.50. I didn't want to sell my shares so I bought back the apr 10s for .51 and resold the May 11s for 1.22. Is this a good move? My plan is to do this every month if it continues to creep up? Any thoughts?


  2. drcha


    Yesterday I had 50 contracts on the BAC apr 10. I own 5000 shares at 5.50. I didn't want to sell my shares so I bought back the apr 10s for .51 and resold the May 11s for 1.22. Is this a good move?


    Congratulations on your successful trades thus far.

    It depends. The safe, conservative thing to do would always be to let them call your stock away. (Since you are trading BAC, though, I expect that 'safe' and 'conservative' may not be your objectives at this particular time.) Doing nothing would have been making the statement, "I think the stock has done as much as it's going to do, and I'm ready to take my profit." Rolling is making the statement, "I think the stock can run some more, and I am willing to sacrifice a small amount of downside protection for the opportunity to enjoy some more stock price appreciation." Rolling is also making the statement, "I think that holding this stock and selling more calls against it is still a better position than letting it go and finding a different trade."

    As for doing this month after month, as you know, eventually it will not work. The stock will eventually fall so that the same or higher strike calls for the next month provide very little premium (then you'll have to decide whether selling lower strike calls on a now falling stock is a good idea).

    Try not to fall into the (very natural for us humans) habit of twisting yourself into knots each month trying to figure out how to keep your stock. Just because you own a stock is no reason to keep it. You could just as well own some other stock, and you can always buy your old stock back. Each month, you may wish to re-evaluate BAC's situation and set a mental stop--a stock price at which you will exit the calls and the stock if the stock price falls. Also perhaps think about at what price you think the stock would be overbought. When it reaches that point, either exit all positions or let them call it away.
  3. droid17



    Thanks for your reply :)

    If I am planning to hold long term what is the risk with the above plan. So yesterday I net (1.22 - .51). This month if it doesn't break 11, I keep the premium possiblly rewrite the calls at a lower strike. If it does I can think about if I want to roll up again or have them called off. Does this sound wrong?

    Thanks again!

  4. I traded covered calls last year and the year before. Keep in mind that it works until it doesn't. What I mean is that it is very nice to collect that nice monthly premium simply to wait, but the key is the stock should either not move very much, or steadily climb higher.

    What do you do if the stock drops 30% against you? Or more? Take a look at BAC's chart over the last year. What about people who bought BAC at 40? It hit a low of 3 and change.

    I only bring this up because you said you were new at this.
  5. spindr0


    The risk / benefit of rolling up my covered calls is simple... It's a neutral to mildly bullish strategy where you collect premiums and you do well as long as the stock doesn't drop.

    I'm risk averse so if I were in a similar position and felt that BAC had more upside potential, I'd collar the position in order to lock in the nice gains already achieved. My comfort zone would be the 9p/12.5c collar for a small credit which would give me decent upside stock appreciation potential but would lock in 3-1/2 pts of the gain should the stock collapse.

    If you're disciplined and nimble, you can also trade the stock component of a covered call (or covered put) intraday.
  6. droid17


    Thanks for your reply johnpinochet :) Well I was thinking if it were to drop I would just hold on. Not a good idea?

    Spindr thanks for your suggestions also. I will look into the collar. Are you talking about buying back and selling the calls when you talk about a nimble approach?


  7. You need to think through various scenarios. Frankly speaking when I started trading them in 2007, I thought they were the greatest thing...and then I had some stocks I had covered calls on go against me. It is not bad when it is only a + or - 10%, but when they start going down without relief, day after day, week after week, month after month, you have to admit that there is something wrong.

    Bottom line, pick your stocks wisely and only buy stocks you would have bought any way for the long term. In addition, think of the covered call as frosting on the cake. It's nice, but the frosting isn't the reason you bought the cake.

    One thing to keep in mind is that scenarios you think might not ever happen, will happen. There was some danger (maybe slight but still there) that BAC and others would be nationalized. There goes your stock.

    Also, generally speaking, regarding the market, I have virtually 100% confidence that we will test the lows one more time this year. I'm so confident in this that I am in the process of going 100% short utilizing any investment vehicles available. With that in mind I don't know how viable a covered call strategy would be for the remainder of the year. This is my opinion only. Study and make your own decisions.
  8. Very interesting thread. I'm learning from this. I've started accumulating blue chips of late and have considered writing options against them (for the first time in my life), so I'm all ears. Keep posting.
  9. spindr0


    It's never a good idea to hold on to stock when it's dropping, particularly for an ATM CC writer whose risk/reward ratio stinks.

    Here's what I posted: "If you're disciplined and nimble, you can also trade the stock component of a covered call (or covered put) intraday." Did I write trade the stock or trade the calls? :)

    As for the collar, it's for the risk adverse. If the stock goes nowhere or keeps rising, you'll regret having wasted money on those puts. If it drops a chunk, you'll love the idea. It's an insurance idea to protect your principle. Is it the best strategy for you? I dunno...
  10. drcha


    Your line of thinking is sensible in a neutral to bullish market; however, I agree with others that you should revise the "just hold on" part.

    BAC is a great example. I bought some many years ago at around $30, and later more at $35, $45 and $50. Steady Eddie, nice dividend, impressive dividend growth, great place to park conservative money for 20 years. I ended up selling it all in January 2008 (which was much too late) for about $35. You can see what would have happened to me if I had been determined to "just hold on." When do you think BAC will return to $45-50? I would have to be selling covered calls until the day I croak just to break even, all the time taking the chance that the stock will be called away from me at something way below my basis. Selling calls on your stock that has tanked is saying, "I am willing to take a chance on losing money in order to have the opportunity to break even." A pretty mediocre strategy. Better to wipe the slate clean early and find a different trade.

    Decide on the number that says to you, "I'm wrong." When you reach it, get out. This may seem hard to do at first, but it will become much easier. I think you might be surprised at how good it feels to get out from under a loser.

    I trust you are spending some of your time studying other strategies. Selling monthly covered calls for income works great--when the sun is brightly shining and all the birds are singing. When the storm clouds arrive, you have to exit that stuff and do something else.
    #10     Apr 19, 2009