We have been using the rolling strategy and time spreads in
your book, “The Short Book on Options,” for our long term
UAL stock, now $38.90 up from 33.50 two weeks ago.  The
stock has gotten a little volatile with the price rising to
where the June 35’s will get called out in two weeks. We
paid 2.25 and they are now 4.30. News reports predict an
excellent profit summer for international airlines, so we
don’t expect much of a decline except for minor corrections
for a while.   It seems our basic option now, without
entering more complicated spreads we don’t fully understand
yet, is to just roll the option to July 35’s at around 5.20
and hope the stock stabilizes. The July 40’s at 2.20 seem
too low to really help do anything but break even.  Now if
we were willing to let the stock be called away, it seems
like it would make things easier seeing the delta is around
.60.

Hello Stefan,

There are a few decisions to make.

1) If you do roll to July for a net credit of about $0.90 per spread, would you be pleased to earn a maximum of that $90 (before commissions) on your (current) investment of $3,410? 

• 2.6% in one month is a decent return, but that's a decision for you to make. (I note from the current quotes that selling the spread for $90 may be difficult right now, but may be easier to accomplish if you wait at least a week, or if the stock price declines by a few dimes.  Obviously the longer you wait, the greater the chances of being assigned an exercise notice early - but unless there is a dividend to be paid, the chances of that happening are still small - not zero, but small)

• You could roll to Sep 35 for more than $2.00.  Main disadvantage - reduced annualized return on your investment.  Main advantage - no need to roll again next month.
  

2) Or do you feel you want to take some additional risk to earn a higher return?

• I understand that the idea of paying more than $2.00 per spread to roll to July 40s is unattractive, but you might want to consider rolling all the way to Sep 40 for a much smaller debit.  This is an attractive alternative, only if you are quite bullish on the stock.  (The August 40s will not be available until the Monday, following expiration.)

• If you decide to roll to July 40, that will only work out well for you if the stock continues to rally.  That's why there's risk involved in making this roll.  Like you, I prefer to collect cash when rolling, rather than paying cash for the roll.

3) I agree.  If the calls you are trading had a lower delta, it would be an easier process.  But there's not much you can do about the fact that the stock is now much higher.  As long as you can earn a decent return by rolling the options, it seems to me that you will want to continue to do that.  At some point, the stock may rise so high that you no longer find rolling to be attractive.  If that happens, than it's probably time to allow the stock to be called away.  But right now, as long as you are willing (or eager) to own these shares, then rolling to Jul or Sep 35 is a very reasonable choice.

--
Mark D. Wolfinger
Create Your Own Hedge Fund: Increase Profits and Reduce Risk With ETFs & Options
http://www.mdwoptions.com