Rolling up covered calls

[spindr0]

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.

I felt that way 30+ years ago when I first met options. The crash of '87 cured me of that.

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.

Never be 100% confident in anything in the market. You might want to hedge that bet just in case it turns out to be 99% (g). FWIW, you can write puts against short positions if you want an income component for your positions (it's the mirror image of covered calls).

 

[spindr0]

Ignoring the options, you have 5,000 shares at a cost of $5.50 with a $5+ gain. Personally, I'd take that kind of profit and run but since this is an option bedtime story, here's another possible approach.

You wrote for 51 cts last month and you're chasing 71 cts this month. While you get to keep the premium, neither one is true profit until you sell the stock (ya know, that stock drop thing?).

Let's pretend you you just had the shares today w/o the written CC's. What else could you do besides the collar to make some money while holding BAC? Actually, you don't have to pretend... you could cover the calls. OK, for example, sell the stock, buy some long term options and write near term OTM against them (diagonals).

The Jan 2010 10 call would cost $3.75 and you could write May 12.5 or May 14 calls against them For the 12.5's, you'd make about the same as your current position if the stock went nowhere, maybe 2 grand if BAC was at 12.50 at May expiration and if BAC plummeted 50%, you'd lose about 2 grand which is a lot less than if you owned the stock. All of this is a guestimate since implied volatility can/will change and that may help or hinder you (the value of your long options). The main theme here is more upside, similar no movement gain and reduced risk to the downside.

The write of the May 14 call is a more aggressive approach - more upside potential andmore downside risk since the premiums are more OTM and lower.

To bump up your profit potential (and reduce downside risk), you could slightly overwrite the position. bringing in some add'l premium. I realize that you indicated that you are new to options so this probably isn't for you at this time but there's no law against thinking about more sophisticated approaches, of which there are many. For the risk averse, instead of overwriting naked, instead, you could add some May 12.5/14 bearish call spreads to the May 12.5 diagonals (no more than 50%). Up to $12.50 you're golden. In the 12.50 to 14 area you start to have issues with the spreads (where depends on how close you are to expiration). Same main theme as above, just possible add'l profit if the stock cooperates and less risk if it doesn't.

These two ideas should not be implemented unless under the supervision of an adult

 

[droid17]

Thanks guys

I am still learning and these responses has helped in my learning process and opened me to new ideas. I am glad I found this board.

Thanks,

droid

 

[johnpinochet]

drcha, and spindr0,

Thank you for your posts. Well said, and everyone is well advised to read your posts carefully.

Regards,

John

 

[jwcapital]

From my experience, I am not a big fan of rolling up OR rolling down. Generally, I would let the shares be called away if expiration day is close at hand. Otherwise, I close out both the long shares and the short call and take my profit. If the stock drops, admit your mistake, and close out both the long shares and short call for a predetermined loss. Two good examples from my life experience. My first covered call: I bought 300 sh of NITE at 100. I sold three 110 call for 30. The stock skyrocketed up to about 160, then reversed and finished at 105 by expiration. I should have closed out the combo near the top, for a decent profit. Remember, the short call does not move in lockstep with the long shares. Second example, I bought 200 sh of QCOM at 220 and sold two 225 calls for 60. The stock shot up to 600. Unfortunately, I didn't take profits. I allowed the stock to be called. So, my point..covered calls need to be managed as any other option strategy.

 

[newguy05]

Quote from 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?

Thanks,

Droid

I think it's fine if you believe bac will continue to move up. You are basically not taking the current month call premium and instead trying to profit on the underlying move. However this only makes sense if the price is close to the strike not DITM, if for example bac moves up to 15, you probably dont want to roll the 10C and instead let it getting called away.

I was in the same boat with drys. Bought the stock at $3.7, wrote the march 5C at 0.4. As drys gapped up slightly past $5, i rolled to apr 7.5C net $0.3. Basically giving back the mar premium and even paying a few cents to keep the stock.

1 week till april expiration, apr 7.5C was trading at 0.05 and drys flapping around at 4.5. Figures i will get some theta and collect more premium, closed out apr 7.5C. And rolled down to apr 5C to collect a freaking 0.25 extra. A few days later, drys gaps up to 7.1. Had i not changed my position and left the original 7.5C intact, i would collected $1.8 extra!! and will probably continue to write the may 7.5C. But as it is now there is no way in hell i am rolling this pig further, so just let it get assigned putting a stick in this one. Just to show you there is no magic, everything depends on the underlying.

 

[spindr0]

Quote from spindr0:

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.

Comparing some of these hedging ideas today might be a good learning lesson.

BAC closed yesterday at $8.02 down $2.60 from when we were discussing it. With your May 11c dropping 80 cts, your net paper loss since then is about $1.80 (ignoring the gain from the stock's appreciation).

The 9p/12.5c collar that I suggested would be up about $1.55 at this point, offsetting a good chunk of the drop... a net loss of about 95 cts.

With BAC down another 50 cts this morning in the pre-market, the difference will be even larger today.

 

[spindr0]

continued...

Quote from spindr0:

The Jan 2010 10 call would cost $3.75 and you could write May 12.5 or May 14 calls against them For the 12.5's, you'd make about the same as your current position if the stock went nowhere, maybe 2 grand if BAC was at 12.50 at May expiration and if BAC plummeted 50%, you'd lose about 2 grand which is a lot less than if you owned the stock. All of this is a guestimate since implied volatility can/will change and that may help or hinder you (the value of your long options). The main theme here is more upside, similar no movement gain and reduced risk to the downside.

The Jan 2010c/May 12.5 diagonal would be down about a buck as of yesterday's close compared with the $1.80 loss on your ATM CC write.

Don't interpret this as an "I told you so". No one knew that the stock would drop. But it did and it demonstrates why I think that standard covered call writing is a poor strategy in terms of risk/reward.

 

[droid17]

Yes, this has been a good lesson and crazy ride So for an update, I ended up buying back the 11s for a small profit and then today put the collar on with the 7.50P and the 10C. I am figuring with the stress test results coming on May 4th this could fly either way and I wanted to make sure I got a decent profit. Look like a decent play?

Thanks again,

droid

 

[spindr0]

Quote from droid17:

I am figuring with the stress test results coming on May 4th this could fly either way and I wanted to make sure I got a decent profit. Look like a decent play?

What I would is irrelevant. If you're comfortable with the potential gain and risk of your new position then it's a decent play.