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Strategy Discussion - Covered Writes


What About Longer-Dated Options?

So far we have only looked at rolling the calls out one month to July. What kind of results can we expect if we roll out to August? The table below compares rolling to July and to August for selected F2M prices. There are 4 weeks from the July to the August expiration, so rolling to August would extend the position by 56 days.


F2M Price/
Roll Month
June 45 Call
July 45 Call
Net Spread*
Return
Annualized Return
$46 / July
$1.10
$1.75
$0.60
1.33%
17.3%
$46 / August
$1.10
$2.45
$1.00
2.22%
14.4%
$47 / July
$2.10
$2.45
$0.30
0.67%
8.69%
$47 / August
$2.10
$2.85
$0.70
1.56%
10.1%
* Assumes transaction costs of $0.05 per roll.

 

If F2M is trading at $46, rolling to the July calls offers the higher annualized rate of return. At $47, the tables are reversed and the August calls generate the higher return. Once again it’s a question of risk and potential returns. If the stock is at $46 are you looking for a higher return over 28 days, or a lower one over 56 days? And at $47 the August calls offer the higher return for the longer period, a clear sign that there is a higher degree of risk in this position.

So while there may not be one “correct” answer, by knowing what alternatives are available, you can make a better informed decision if you know which rolling opportunities are available.

One Last Factor

Our examples have assumed that F2M pays no dividends. When calculating potential returns from rolling calls it is very important to include expected dividends in the returns calculations, as they can turn a border line trade into an attractive one. And don’t forget that the key day is the ex-dividend and not the payable date.


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