Things Have Changed – Time to Roll
Sometimes you sell a covered call option and as the contract date approaches, you think to yourself, “I wish I could renegotiate the contract!” The good news is that sometimes you can. You aren’t really going to negotiate, but you can get out of the old contract and buy a replacement. This can work to your advantage and to the advantage of the other traders.
For example, if you originally agreed to sell your Pfizer (PFE) shares at $51.50, and now the shares are trading at $52, it is likely your shares will be called away. There is also an Ex-Dividend date on the horizon for PFE shares (after the contract will probably fill) and you realize PFE is a good investment. What can you do? You can sometimes roll the contract. You buy back the old contract and sell a new one. This is a single trade. It is not complicated. It is like taking one pizza out of the oven and putting a new one in the oven.
The Outcomes of a Roll
If it makes sense to roll, you will likely have a longer contract. In other words, if it is a monthly option, you might have to roll it out another month or more. You would only do this if you are convinced that the shares of PFE will continue to increase in value and that they are a good long-term investment. To roll a contract, you may have to spend a little money, but this could be far less than you think. You might also be able to do this roll at essentially only the cost of the commissions and fees. But even better, you might not only get a higher contract price, but also get paid for the higher, longer-term contract. Are you interested?
I am, and I do this type of covered call trade quite frequently. In fact, in 2022 I did 102 roll transactions. These cost me $31,654 to sell the contracts I had. However, I did not lose money on this approach. In fact, the profit on the new covered call contracts from the roll was $50,082. So the net profit during 2022 for doing rolls was over $18K. Because each roll trade takes less than ten minutes each, I spent less than 20 hours entering roll trades in 2022. In other words, my net income was about $900 per hour just for rolls of covered call options.
An Example for 2023
Cindie has 500 shares of Pfizer (PFE) in her traditional IRA. I had sold a covered call on her shares for a contract price of $51.50 back on December 19, 2022. The contract was set to expire on January 20, and the shares were almost trading at $51.00 per share. Sadly, the next ex-dividend date is January 26, and the dividend is $0.41 per share. If she still owns the shares on January 26, she would be receiving $205 in dividends.
With the original contract she would get a profit from the sale of her shares. However, I found a way to roll her shares from the January 20 contract to a new March 17 contract at a contract price of $55. That is a price that is $3.50 more than what she would have received if her shares were called away in January. Let’s do the math. $3.50 times 500 shares is a potential of an additional profit of $1,750. It was time to act.
Figure 1 – What is the (1) equity summary score, (2) earnings date, and (3) dividends picture? It seems I sold the contract for Cindie at a price that was too low. The contract for $51.50 made sense on December 19, 2022, but today it doesn’t make sense. The shares have risen in value faster than I assumed they would.
Figure 2 – When rolling calls, you will typically be picking a contract date that is at least one month from the current contract date. This image shows four possible choices. If the number is red, it means I have to pay something to roll the contract. If it is green, someone will be paying me for the higher contract price and longer expiration date. So 1 and 2 will cost me something and 3 and 4 might give me even more option income. But I choose 2. See the next step.
Figure 3 – It looks like March 17 is a good choice. I only have to pay $0.02 ($10) to roll the five PFE covered call contracts. That is a low price to pay to ensure that I will get the $205 dividend for Cindie.
Figure 4 – When you roll a covered call, you are buying to close (BCC) the current contract. This means you are paying someone to take your contract obligation. You are also doing a SCO, or Sell To Open a new contract. Because you are willing to accept the March 17 expiration date, someone is willing to pay you for the new contract. The difference between the two gives you a slight cost or a slight profit.
Figure 5 – When I preview the order, I can see that it will cost Cindie $6.50. That is because I wanted to do an even trade. In other words, I wanted the only charge to be the actual commissions, not a loss of $10.00. Otherwise, I would have paid $16.50 for the loss and the commission.
Figure 6 After submitting the order, I had to wait a couple of minutes. But it wasn’t long until I was able to create Figure 7.
Figure 7 – Success.
Sometimes the best thing to do when you sell a covered call option is to let it expire. Sometimes it is OK to have your shares called away so that you can use the proceeds from the sale of those shares to buy a different investment. But sometimes it is possible to roll the covered call for a two-fold benefit. One benefit is often additional profit and a higher contract price. The other can be a dividend that you might otherwise have missed.
Links for Learning Fidelity does a nice job explaining the rolling of covered call options. FIDELITY ROLLING COVERED CALLS
The Day of Wrath is Coming, and You Cannot Roll It Back
Learning how to make money or trade options is, at best, a short-term gain. There are bigger issues to think about. For example, it is very foolish to assume that God will not be just. He is just, so he has to do what his very nature requires. However, true justice means there is a penalty. Solomon makes it clear that you cannot buy relief from God’s wrath with anything you have. You need righteousness. Solomon says righteousness delivers from death. But we don’t have any righteousness to offer. “Riches do not profit in the day of wrath, but righteousness delivers from death.” Proverbs 11:4
How then does righteousness deliver? Via a Deliverer named Jesus.
The good news of the gospel is that Jesus said he came as the Messiah Savior to call and save sinners. He said this: “Go and learn what this means: ‘I desire mercy, and not sacrifice.’ For I came not to call the righteous, but sinners.” Matthew 9:13
Has he called you? Don’t delay in answering his call. If in doubt, you may want to start by reading John’s Gospel. Or schedule some time with me and we can talk. That is far more important than talking about investments.
All scripture passages are from the English Standard Version except as otherwise noted.