Rolling Covered Call Options

Rolling options is when you have a covered call position and you buy back the option portion and sell a different option (different expiration or strike, or both).

Rolling options is an important part of maintaining your covered call positions. The reasons you may want to roll the option you sold include:

  • The underlying stock goes down, and there is little time premium remaining.
  • The underlying stock goes up, and there is little time premium remaining.
  • Time has passed, and there is little time premium remaining.
  • The underlying is about to go ex-div, and there is little time premium remaining.

See the common theme? A large part of covered call investing is about collecting time premium, and if the option you sold has very little time premium remaining then it could be time to buy it back and sell another option that has more time premium.

Example: Two months ago you bought 100 shares of XYZ stock at $50 and sold an option with a strike of 55 for $3. At the time you sold it, the option had $3 (per share) of time premium.

Now, two months later, let's imagine XYZ is still at $50 but the option has declined to $0.25 (because two months of time decay has eroded its value). There is another option, with a strike of 55 (same strike) and an expiration date that is 2 months farther out that is trading at $2.50.

You could roll your option by paying $0.25 to buy it back (close it out early, prior to expiration) and then sell the new longer dated option for $2.50; so you receive a net credit of $2.25 additional time premium.

Your other choice in the example above would be to just wait until the original option you sold expires, and then sell a new option the Monday after expiration day. That's a reasonable choice but, many covered call investors who actively manage their positions like to roll their options when there isn't much time premium remaining to increase their downside protection. By selling a new option with more time premium you gain that much more downside protection (you lower your break even point by the difference between the option you buy back and the amount you collect for the new option you sell).

Another reason for rolling is if your option is ITM, near expiration, and you want to avoid having it exercised. Maybe you don't want to lose your stock because it's in a taxable account and you don't want to take the capital gain or loss. That would be a valid reason to roll. (Note that in a non-taxable account, like an IRA, exercising is less of an issue because if your stock is called away you can just go back and buy it again without worrying about the tax implications.)

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