Rolling Covered Call Options of Valero Holdings

Valero Energy Corporation Rolling Covered Calls

Last week I shared my experience in rolling a covered call option for 100 of my Microsoft shares. Today the focus on my 500 VLO shares and the five related covered call contracts. For VLO I wanted to increase the contract price and extend the expiration date of the contract. The shares of VLO have been going up while MSFT shares have been going down in value. So, as a result, my approach was different.

The Valero Options Roll Trade

My original covered call contracts were sold on Wednesday, March 9. The contract was set to expire two days later at a contract price of $95. In other words, if the VLO shares closed above $95 on Friday, March 11, I would have received $47,500. In addition, I had already been paid $106.59 for the five contracts.

On Friday afternoon, March 11, using the options roll feature, I bought a closing transaction (BCC) to exit the March 9 contract (ticker symbol -VLO220311C95). Then, the roll software allowed me to specify a new contract date and price. So, I sold an opening transaction call that expires one week later on March 18. The ticker symbol for that trade was -VLO220318C97. If you compare the ticker symbols, you will see that they both contain the VLO ticker symbol, the contract expiration date (YYMMDD), a “C” for call, and a per share contracted dollar amount ($95 for the buy and $97 for the sell). I did not type those ticker symbols, because that is done by the software.

Two trades on the same shares in one week. Valero Energy Corporation

This roll trade was even more profitable. It cost me $20.15 to close the March 9 contract, but I received $566.59 for the five new covered call contracts. Therefore, I received $113.20 per contract. My net gain on these sales was $106.59 – $20.15 + $566.59 = $653.03. YTD my income from options trades on VLO has been $1,134.27.

Don’t forget that I also might receive $48,500 for my shares if they sell at $97. In other words, by being willing to wait one more week, I might increase my profit by $2,000. But that is just a maybe. Maybe I will be keeping my shares and the money I already received.

What is the Risk I have Accepted?

Like all trades, there is risk. But the risk is understood whether I hold or sell the shares. For example, the shares could drop to $85 on Monday. That means I get to keep my shares if they don’t rise to $97 by Friday. But it also means I cannot sell the shares before Friday because I have already promised to sell them at $97. That is what the “covered” part of covered call means. It means my five options contracts are covered by 500 shares I own.

A second risk factor is that the shares could shoot up to $101. If that happens, I have to sell them at $97. That is a risk with all options trades. However, I have already determined that I would be happy to sell at $97. Therefore, I won’t feel like I missed out, because I could have sold my shares on the open market last week at a lower price.

If VLO drops during the week, I could do another roll. This would look similar to what I did with my MSFT shares last week. For example, I could buy back my $97 contract and sell a $95 contract for March 25. As another approach, I could do nothing with the contracts, and then do a fresh covered call on Monday, March 21.

Most Options Contracts Expire Worthless for the Buyer

The reality is that most of my covered call contracts expire worthless to the buyer. I get to keep the money the buyer gave me, and I get to keep my shares of stock or the ETF fund.

Many novice investors don’t really understand options. They pay me for the opportunity but not the guarantee to buy my shares at the contract price.  I have read that Robinhood investors are a growing options trading crowd. I don’t know for certain, but I believe the average younger Robinhood investor does not really have a good understanding of options trading.

Full Disclosure

I own 500 shares of VLO. Year-to-date I have earned an additional $490 in dividend income on my 500 shares. If we add up the options income and dividend income, I have received $1,624.27 of income for VLO options trades in 2.5 months.

YTD Total Options Income

Week Ten Options Trades including MSFT, VLO, and DRI roll trades.

We are now ten weeks into the new year. My total options income is now $29,508.29. Said another way, I made on average $2,951 per week trading options. To put this in perspective, our dividend income for January and February totaled $15,745 in all of our accounts. On a weekly basis that averages $1,968 for the eight weeks. I remain a committed dividend growth investor. That requires little effort or time. Options trading, in contrast, does require about six hours of work every week.