Calculating Returns

To calculate the return that can be earned on this roll we have to keep in mind the following: there are 4 weeks between the June and July expirations. This means that if we roll our call, we are extending our commitment to sell F2M at $45 for another 28 days. We also have to keep in mind that if the calls are assigned we will get $45 per share from the sale of F2M, and will have $45 to invest. Our return on the roll becomes:

$0.60 / $45 = 1.33%

We then annualize this return, and obtain:

1.33% X (365 / 28) = 17.3%

Rolling our June calls to July will generate an annualized rate of return of a little over 17%. Is it worth it? The answer depends on our risk assessment of F2M and our risk tolerance, so there is no one correct answer here. But this rate of return can be compared to other investment opportunities currently available to us.

The table below shows what happens to the roll as F2M rises further and further above the calls’ strike price. The deeper in-the-money, the less risk in rolling the position, but also the lower the potential return.

F2M Price June 45 Call July 45 Call Net
Return Annualized Return
$46 $1.10 $1.75 $0.60 1.33% 17.3%
$47 $2.10 $2.45 $0.30 0.67% 8.6%
$48 $3.10 $3.25 $0.10 0.22% 2.9%
$49 $4.10 $4.20 $0.05 0.11% 1.4%
* Assumes transaction costs of $0.05 per roll.