From the April 2013 issue of Futures Magazine • Subscribe!

How do I protect myself in a rising market when I write covered calls?

Solution: Rolling the call

One way to avoid this consequence is to move the call so that it’s no longer in the money. The process is referred to as “rolling” the call. In essence, what you do is you buy back your short call option and sell a new call with a strike price that is higher than where the stock is trading. To illustrate, consider the following example using Goldman Sachs (GS) stock and the option chain below:

Suppose that when you initially bought GS, the stock was trading at $145 per share. At the time, selling the 150-strike calls to obtain some extra premium seemed like a good idea. However, now, with the stock at $153, your 150-strike calls are in-the-money. If the stock remains there until expiration, or if it drifts higher, you run the risk of having your stock called away. 

To obtain some peace of mind, you decide to roll your calls from the 150 strike, which is now in-the-money, to the 155 strike, which is out-of-the-money. To execute the roll, you would:

  • Step 1:  Buy back the March 150-strike calls for $3.80 to close.
  • Step 2:  Sell the March 155-strike calls at $0.99 to open.

The result is you would still have a covered call position, but would have accomplished two things in the roll process. First, you would have moved your short call position enough so that your call strike is now out-of-the-money, thereby minimizing the risk of having your stock called away. Second, you would have increased your breakeven level from 153.80 to 155.99.

The downside to this process is that to achieve these benefits, you would have paid out a debit of $2.81, or $281 per contract, to roll your position. This decision could come back to haunt you if the stock then decides to move lower, possibly below $150 per share.

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