Roll Covered Call Option

To roll covered call option or not to roll them? That is the question. Ok, so you have sold a covered call on your stock and it is approaching expiration. What can you do now?

If the call is close to expiration you probably have a good idea whether or not you are going to get called out of that option. If the option is ITM or the strike price is below the price of the stock then you will probably be called out, unless of course you buy back the option.

If you are ITM and are not going to buy back the option contract back then you don’t have to do anything. You simply wait for the option to approach expiration. Once it does you will automatically sell the stock for the strike price of the option.

But what if the option is OTM and is nearly worthless. There are many times when the call on a stock would be worth $.05 and still has 1 week before expiration. In this case you can choose to either let the option sit and slowly make that extra $.05 or to roll your options to a later date.

If you choose to roll your option you will buy back your option and sell another option at a later date. For example if the next month’s option contract is selling at $.80 and your current call option is trading at $.05 it could definitely be worth it to buy it back at $.05 and sell another one for $.80.

The advantage of rolling options to a later date in this case would be because you think you can collect more money by rolling the option then you can by waiting for the option to expire and selling the new option.

It could be that the stock stays the same or goes down a little by the time your option expires. In case you may only be able to get $.50 instead of $.80 for the next month’s premium. In a situation like that it would make sense to sell the option as soon as you can in order to collect the most premium.

This could potentially be more profitable then letting the other option melt away before buying the next months, but it is up to you to decide to roll or to stay put.

How To Roll Covered Calls

Each broker has a slightly different way of doing this so you should check with your broker to get the step by step procedure you must take. My broker allows me to click on the option I want to roll scroll down to “roll option” and then enter specifics. I imagine most brokers work in a similar way.

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