How to Save Your Covered Call Position (2024)

The stock market is inherently unpredictable and even low-risk strategies can be ruined by new information. For example, covered calls provide a convenient way to boost portfolio income, but there can be a high opportunity cost if the underlying stock moves sharply higher. Rolling covered calls is a common way to manage these risks over time and keep your trades on track.

Let’s take a look at what’s involved in rolling a covered call and some things to keep in mind when executing a covered call roll.

What Is a Covered Call Roll?

You can roll a covered call by closing out the call option that you initially sold with a buy-to-close order while simultaneously selling another call option to replace it. The new call option may have a higher strike price (rolling up), lower strike price (rolling down), longer expiration date (rolling out) or some combination of these changes.

There are many reasons to consider rolling a covered call:

• The stock price might rise above the strike price of the covered call, which increases the assignment risk. If you don’t want to sell the stock, you may decide to roll the covered call option to one with a higher strike price and reduce the assignment risk.
• The stock price might fall well below the strike price of the covered call, which creates an opportunity to realize even more income. You may decide to roll the covered call option to one with a lower strike price in order to realize more income.
• The stock price may remain the same, but you’re worried about a near-term catalyst. You may decide to roll out the covered call to an expiration date further into the future in order to mitigate the short-term volatility.

The decision to roll a covered call involves its own set of trade-offs. For instance, you can avoid assignment by rolling a covered call out, but you still have an assignment risk if the stock price continues to trend higher. Each time you roll out a covered call, you’re paying another commission and still missing out on the stock price appreciation.

There is no scientific formula for deciding to roll a covered call—it’s a subjective decision that investors must make based on their individual circ*mstances. That said, skilled investors try to take a consistent and systematic approach that eliminates emotion and helps make results more predictable over time—such as the Snider Investment Method.

Types of Covered Call Rolls

There are many different types of rolls depending on your specific requirements. In the first example above, you would want to roll up (or move to a higher strike price) whereas, in the third example, you would want to roll out (or move to a later expiration date). There are five distinct possibilities when it comes to rolling covered calls.

The five ways to roll covered calls include:

• Rolling Up: Buying to close an existing covered call and simultaneously selling another covered call with a higher strike price.
• Rolling Down: Buying to close an existing covered call and simultaneously selling another covered call with a lower strike price.
• Rolling Out: Buying to close an existing covered call and simultaneously selling the same strike with a later expiration date.
• Rolling Up and Out: Buying to close an existing covered call and simultaneously selling another with a higher strike price and later expiration date.
• Rolling Down and Out: Buying to close an existing covered call and simultaneously selling another with a lower strike price and later expiration date.

Let’s take a look at an example of rolling up and out to avoid assignment:

Suppose that you entered a covered call position 30 days ago by purchasing 100 shares of Orange Inc. stock at $130.00 and selling one May call option with a $135.00 strike price for a $0.44 premium. The stock is now trading at around $135.00, and you’re worried about the option being called away. You also expect the stock to continue trading near these levels.

Example of a covered call’s dynamics. Source: The Options Bro

You could roll up and out to avoid assignment. The trade would involve buying back the original May option for $1.50 and selling one June call option with a $140.00 strike for a $1.10 premium. After taking a loss of $1.06 on the original position, the new call option premium creates a net credit of $0.04. Keep in mind, you also have the potential to $5 more on the sale of your shares since you move the strike price up from $135 to $140.

Alternative Strategies

Rolling options is the most common way to manage covered call options going awry, but it’s not the only way to manage the position. For example, suppose that the underlying stock moves higher, and you want to lock in covered call profits. You could purchase a protective put option on the stock—in addition to the covered call—to create a collar and lock in the gains.

A riskier strategy might involve converting a covered call position into a diagonal spread in order to limit downside risk from the underlying stock moving lower. The strategy would involve selling the underlying stock and purchasing a call option with a longer duration than the short call, which would deliver the stock if the price moved against you.

In addition to using other options to create new strategies, you could also decide to simply exit a covered call position prior to expiration. Buying to close the call option will eliminate any obligation. A common situation would be when a covered call position moves deep in-the-money. Rather than holding the option through expiration, you could buy back the option prior to the end of the contract to lock in profit.

The Bottom Line

The stock market is very unpredictable, so it’s important to always have a backup plan. When it comes to covered calls, a common backup plan is to roll calls up, down, out, up and out, or down and out, depending on your goals. The key to success is taking a consistent approach to rolling these positions while being mindful of the potential downsides.

If you use covered calls, the Snider Investment Method can help you maximize income and control risk using a variety of tools and techniques. Sign up for our free e-course to get started or inquire about our hands-off asset management services.