Is Action Required?

The second possibility is that, immediately prior to the options’ expiration, the shares are trading above the calls’ exercise price. If our investor does nothing the odds are that the calls will be assigned, the shares sold at the options’ strike price, and the investor left with cash to reinvest. This may be the investor’s objective and doing nothing is the indicated strategy.

But another avenue is open: rolling the calls out to a later expiration date. Let’s look at an example. It’s the Wednesday before June expiration. You are long 500 shares of Fair to Middling Corp (F2M) now trading at $46, and short 5 of the June 45 calls. If the stock is unchanged or drifts up over the next 2 days and you take no action your calls will be assigned, you will sell your shares at $45 and will have to look for a new investment opportunity.

But if your outlook on F2M is still positive and you have no problems holding these shares for another 4 weeks, you could consider rolling your June calls out to July.

Rolling out consists in buying the calls you are currently short and writing another series of calls with a later expiration date, in this case, July. The trade is usually done as a spread, meaning that an order is placed to buy the June calls and sell the July calls for a net credit. Getting back to F2M we notice that the June calls are trading at $1.10 and that the July calls are $1.75. We could therefore roll our June calls out for a net credit of $0.60, assuming transaction costs of $0.05 per roll. Is this trade worth doing?

  VIX Snapshot

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