rollling on about rolling

With regard to rolling, I agree with everything Paul says below.  (I should, since he’s been a very helpful mentor for me in options trading.)  And I agree that playing with rolling options should come only after you’re pretty comfortable with “regular” options trading, so stop reading if you aren’t there yet J.

Here is one of Paul’s paragraphs copied from below:

If the stock is in the money by more than what I sold the option for, I say just let the stock go (or be put to you in the case of PUTS).  You should have made that assessment when you sold the option that you were happy to do the business at the strike. So this is your opportunity prove that you did not lie to yourself and you just need to stick to the PLAN>

His guidance provides helpful reinforcement for me right now.  I sold some weekly calls that expire tomorrow.  After today’s mid-day run-up, they are well into the money.  In fact the current price of the stock is about 10% above my strike price.  So given that, and with only one day left until expiration, the remaining time value for my options is virtually zero.  Because the stock has appreciated so much in a relatively short time, it’s tempting to roll up and out – i.e., buy-to-close and then sell-to-open at a higher strike price (maybe near the money or even in the money a bit), using next week’s expiration.  However I would have to pay a net DEBIT in order to do that.  I’d eventually come out solidly ahead IF the stock gets called away at the new, higher strike price, but of course there are no guarantees.  If the stock price falls below my new strike, I’d still own the stock and I would have absorbed the very expensive BTC premium that was only partially offset by the STO premium.  In other words, I need to stick to the PLAN.  Logic and forethought need to prevail over greed.


From: [] On Behalf Of Paul Madison
Sent: Thursday, September 13, 2012 12:29 PM
Subject: Re: [cool_club] FAST

All this discussion is great!

But I do want to say that at times we are going to move from simple to more complex trades.  This is one of those times.  If you are new to selling covered options it would probably be best to skip these more advanced trades until you get the basics down.  You will not need to know these in the beginning but you invariably will want to learn them down the road.  I would recommend if you are a newbie that you stop reading now, maybe print this note out or save it somewhere.  Someday you will say I remember Paul had a note on "Rolling" and I think I am ready to read that.

So Ron is talking about Rolling which for us Covered Option sellers is when we do a Buy-To-Close at the same time that you do a Sell-To Open.  So you are closing one position and opening a second.  Ron is right that at most brokers you will save on commissions by doing a "roll" which means you do both of the actions as one trade.  To do this at most brokers you actually use a different trade screen and we will take a look at this at some future COOL Club meeting.

So here are some of my rules for rolling:

So when a stock has moved to being in the money versus my strike but by less than the amount I sold the option for then rolling is a consideration.  Because I should be able to buy back the option for less than I sold it for and so make some small amount of money on my original trade and go ahead and re-position a second Covered Option Sale. So as an example I sold for $1.50 but the current price is $1 in the money versus my strike. Then as you get close to expiration (the last few days) you should be able to buy it back for right around the $1 level maybe $1.10 or $1.20 or 1.30 (you get the picture).

You will want to wait as close to the expiration as possible so that you are minimizing the amount of "time premium" you are buying.  Because remember time premium is something that goes to zero at the point of expiration. Why buy anything that is going to be worthless or if do buy it be sure we spend as little as possible.

If the stock is in the money by more than what I sold the option for, I say just let the stock go (or be put to you in the case of PUTS).  You should have made that assessment when you sold the option that you were happy to do the business at the strike. So this is your opportunity prove that you did not lie to yourself and you just need to stick to the PLAN>

So that is the BTC piece, now the STO side of the Roll.

First on CALLS, I think it is wise to only ROLL OUT (later expiration date) or ROLL UP (higher strikes) or ROLL UP and OUT.  I do not think ROLLING DOWN on calls makes sense.

Likewise on PUTS I think it is wise to only ROLL OUT or ROLL DOWN.  I do not think it makes sense to ROLL UP for PUTS.

My philosophy on the ROLL is I want a 20% or greater APR on the net premium we are collecting.  

So if we are doing a BTC @ $1 and we can STO  for $1.80 then we are picking up $.80. If we are looking at a $42 stock  and we are rolling out say a month,  then our APR would be $.80 (the net credit we are receiving) / $42 x 365 / 30 days (difference in expiration dates) = 23%.

That is a lot to take in and we will do a COOL Club on Rolls at some point in the future.

Keep hitting those singles, Malcolm, as that is where the real money is made!

Paul Madison

On Thu, Sep 13, 2012 at 11:13 AM, Elliott, Ron <> wrote:


I think you're well beyond Step 2.

Another way of looking at your two trades is to do the BTC and STO simultaneously (through a multi-leg order).  Then, in deciding on the parameters for your order, you can just worry about the net difference between your sell premium and your buy premium.  Depending on the broker, there also MIGHT possibly be a savings in commissions.

I just looked at the Oct 20 option chain for FAST, and the bid and ask prices at that time were:

        $41 strike      $2.30   $2.45

        $44 strike      $.80    $.90

So, for example, if you wanted to increase the chances of the trade happening right away, you could submit an order with a net credit of $1.40 ($2.30 - $.90).  Or if you wanted to hold out for a little more money, you could try for a net credit of $1.65 ($2.45 - $.80).  Of course you could set the order at whatever level you want and see what happens.

Using the current stock price, the APR for a net credit of $1.40 would be about 33%, and for a $1.65 credit it would be about 39%.


-----Original Message-----
From: [] On Behalf Of Malcolm Myles
Sent: Thursday, September 13, 2012 10:47 AM
Subject: [cool_club] FAST

I'm trying to liquidate 400 shares of FAST that have a healthy capital gain due to my buy smart, hold long behavior (>400%).  I thought to use CC to have the stock taken at my price and make some extra cash while learning a few things about options.  I wrote the following trade August 22

     STO FAST 4x C 44.00 Oct 20 @ 1.91

I didn't know about COOL Club or how to use APR to evaluate a trade.
Turns out it was a "Seeing Eye Single" and netted me $752 and an APR of 26%.

I still need to liquidate the stock (before the end of the year) and still need to learn.

So... Today I put in an order

     BTC FAST 4x C 44.00 Oct 20 @ 0.70

This will close out my position at a cost of $289 for a net of $463 and an APR of 42% in 23 days if/when it fills.

Then I'll write the following

     STO FAST 4x C 41.00 Oct 20 @ 2.70 for a net $1,071 and an APR of 62% or whatever is available in that range and ITM.

I know that there is an earnings due on Oct 21, but I really don't care if my stock is taken at 41 because the difference between 44 & 41 is
$1,200 which is less than my projected option income of $1,552.  I believe the earnings call will cause the stock to drop (buy the rumor, sell the fact). If I don't get called away in October (or if I BTC the C 41.00), I still have time to write more calls or sell the position out right before the end of the year.  If the stock drops below 40 and remains there, I'll continue to hold the position and continue to write up calls.

Comments welcome as I believe I'm only on step 2.