Rolling A Covered Call Option Tutorial: Why, When And How - Trading Like A Pro

rolling a covered call first of all what is it well it's a strategy where you buy back the call that you sold and then sell another call option usually with a different expiration date and in this video right now over the next few minutes we will discuss the why when and how we will talk about why would you roll a covered call when should you roll a covered call we will also talk about how exactly do you roll a covered call we will talk about just a straight rolling up and then also rolling up and out rolling down and out then we also talk about can you roll a covered call forever let's just very briefly uh recap the covered call strategy and what this is i'm going to jump on the start chart here so you see a covered call is a strategy where you sell a call option against your existing stock position and the idea is to collect extra options premium in addition to making money on the stock so here is an example i sold put options on camping world with a strike price of 37.50 so here's the strike price of 37.50 and this is where on friday june 18th right here i got a site so i got assigned 2 700 shares of camping world at a price of 30 50 per share now this is where then on monday june 31st i sold covered calls against my existing position and this was right here that was last week and for every 100 shares that i own i sold one call and i sold each call for 50 cents and since calls are trading in 100 packs that is 50 so since i sold a total of 27 call options and i received 50 per call option i made one thousand three hundred fifty dollars in premium and that's not bad for four days now one of two things will happen so on expiration date which was on june 25th right here cwh number one will either trade below let's start with below actually we trade below 39. well what happens is in this case in the call options expire worthless i keep the premium and i can sell more call options or door number two cwh camping world will trade above 39 in this case my stocks that i own are getting called away at 39 i would make 1 350 in premium and in addition i'm making another 1.50 per share since i bought them for 37.50 times 2 700. that is 4050. so my total profits on this trade would be 5 400 not bad at all it's pretty sweet profit so why why why in the world would i mess with this trade so why would i roll a covered trade there's one main reason for rolling a covered call and that's actually very simple you should roll out your covered call when you have the opportunity to make more money by rolling than holding onto position so let's just continue our example i just want to go back to last friday and i want to show you a five minute chart of camping world and as you can see camping world was trading above the strike price of 39 so if i hadn't done anything last friday my stocks would have been called away and i would have made 5 400 again not bad at all so why the heck did i decide to roll out my covered call position well let's talk about this i'm actually going here to a daily chart again because this way it's a bit easier to illustrate what i'm doing on friday the call option with a strike price of 39 let's talk about this week's the july 2nd so last week the expiration was june 25th this is the one that we want to roll because this one the june 25th the july option was trading at 1.60 so and at the same time i could buy back the june 25 call for a dollar now i sold this for 50 cents so this means that i'm experiencing a loss i'll lose 50 cents per option by closing out this trade but i'm collecting 1.60 for next week's call if we look at all this the net actually is let's uh go back here so by rolling out i'm actually making 60 cents per option and since they're traded in hundred packs so for my 27 options times sixty dollars this is one thousand six hundred twenty dollars why would i do this again if i would have done nothing i would have made on this trade five thousand four hundred dollars not bad but by rolling the option i can collect another one thousand six hundred twenty dollars in options premium and again now there are two possible outcomes for this friday july 2nd and the possible outcomes are again number one cw8 is trading below 39 on friday's close and so i just make the additional 1620 premium i already collected 1 350 previously so i would make 2 900 700 no matter what however if cwh is above 39 door number two my stock gets called away and since i bought them for 37.50 i will make an additional we have just talked about it dollar fifty by share so this would be an additional four thousand and fifty dollars so this means the total premium here instead of just making five thousand and four hundred dollars i can make seven thousand and twenty dollars okay so this is what i can do by rolling out in a nutshell rolling this covered call will bring me an additional 1 620 in profits and if you switch to my account right now that you see for cwh which is the second row here right now you see i'm already up seven thousand two hundred and seventy six dollars so instead of just taking the fifty four hundred dollars and running i'm are now already up seven thousand two hundred dollars so uh we gotta talk about this rolling is very subjective because what's the downside well the risk here is when rolling it i'm now keeping the position longer so the risk is that camping world would actually drop below the price that i was assigned so if camping world over this week by the end of the week drops below 37.50 okay then i would lose money on the stock but you see as long as i am somewhat bullish on the stock and based on my three indicators here i am bullish on the stock so i can just keep rolling the call and collect more premium every single week and this will then increase my overall profits on this trade week after week so let's talk about it how to roll a covered call rolling can be done at any time before or on expiration date and for me personally i usually only consider it on expiration date and there are two ways on how to roll number one you can do it manually in this case you first buy back the option that expires this week and then you sell the option that expires next week or number two and let me show this you can let your broker do it because you see many brokers if you're looking at cwh here right now they offer a role option so here i can for example roll expirations and you can set a minimum price that you want to receive net after rolling now in the example that i told you just a couple of minutes ago it was 60 cents and here you see if right now i would roll it into next week i would receive an additional 40 cents so i can do this so when you select the same strike price and just roll the expiration date it is a so-called simple roll out now in addition you can also roll up and out sometimes it might make sense to roll up your call option and let me just show you how to do this so in our example i could choose to roll up from the 39 strike price into the 40 strike price let's just plot it here so what i would do is i would buy back the calls that expire this week july 2nd right because these are the ones that i currently have so would buy them back and right now it would be probably for a dollar 70 right and then at the same time for next week i am not doing the same strike price because we already talked about this this is where i would get 40 cents no this is where right now for this particular one i'm going 2 strikes out to the 40 strike price so in this case i would have to pay 20 cents per option so why would i do this why would this make sense that right now i'm paying 20 cents for this well let's uh jump back on the charts here is what would happen if i'm rolling it out to next week and again this is where we are rolling out and we're rolling up to a strike price of 40 so i pay 20 per option and i have 27 of those so i pay 540 or just to be honest i'm giving back some of my premium that i've received earlier because i told you that i received 1 350 in premium so part of this i'm giving back but but but if camping world rallies above 40 i would make an additional dollar per share so this would be an additional 2 700 so basically i'm buying the possibility of making an additional 2 700 for 540 so in a nutshell i make less money in options premium but i collect more money if the stock price rises above 40. however i want to be honest rolling up and out i i don't think that i've ever done it but what you could do is rolling down and out let's talk about this if for example i'm no longer bullish on the stock i could roll my call option down and out so let me give you an example so as previously we are looking at the july 2nd that i have right now so we're buying it back for approximately right now you see the bid ask is a dollar sixty five over a dollar eighty so it's probably we would pay a dollar seventy since i sold this particular one so i sold it as you can see here for a dollar sixty one so i would lose around ten cents on this call or two hundred and seventy dollars but but but but i could sell the call option for next week july ninth and now i can actually roll it down from the 39 to the nearest strike price to 38.50 this is where you can see the bid ask is 240 over 255 so i would probably collect 2.50 so let's do the math here and see if this makes sense so i'm giving up so buy back july 2nd and i'm losing 270 and then sell the 38.50 rolling down july 9th and for this i would get 2.50 so that's 27 times 250 dollars and that is 6 700 750 dollars that's not bad at all now keep in mind with this you're still making money on the stock so the only downside if cwh stays above 38.50 i only make one dollar per share times 2700 so this is an additional 2 700 because i bought the stock for 37.50 and i will be called away at 38.50 because that's right now my new strike price and that's one dollar per share or 2 700 for the whole trade so total from the trade if we bring this all up if i would roll down so let's do the math really quick here and the math is that i received 1 350 and this is from the initial call that i sold then i lose 270 from buying back the july second call and i receive plus 6750 for the july 9th call i also get 2 700 if cwh stays above 38.50 by friday so this is the gains on the stock for a total of ten thousand five hundred and thirty dollars for this trade and this trade is only what three weeks two weeks three weeks a three-way trade for ten thousand five hundred thirty dollars now that's not bad at all right and i know that we did the math super super quick but before we move on so you can always rebind this this is why it's a video that lives on youtube forever so if you need to run through the math you can go back and pause the pause the video anyhow so if this is so amazing this this rolling stuff can you roll a covered call forever the short answer yes but you must have your bookkeeping under control to keep track i mean as you can see whenever you roll a call you might make or like right here lose money on the call that you're closing early so make sure that you account for these losses because otherwise you make much less than you think now as you can see rolling calls can be very very beneficial if you know what you're doing if you would like to know how i actually got paid in addition to all of this i got actually paid 1 350 this is in addition to all of this for a total of almost 12 000 so if you would like to know how i get paid 1 350 to buy these shares at a discount then click on the video that pops up right now and i'll explain it in detail in that video because this is the wheel strategy and i want you to know about the wheel strategy so take a look at the video right now i also link to it in the description and i will see you in the next video

Channel: Markus Heitkoetter

Views: 7,933

Rating: 4.9252338 out of 5

Keywords: stock trading expert, Rolling covered calls, Rolling a covered call, rolling covered call options, covered call, options trading, rolling covered calls strategy, rolling covered calls, covered call management, rolling covered calls up, covered call adjustments, covered call option strategy, options trading for beginners, Rockwell Trading, Markus Heitkoetter, Coffee with Markus, Truth About Trading, Make Money With Trading, how to trade stocks, how to trade options

Id: Da3dXfOvmiQ

Length: 15min 18sec (918 seconds)

Published: Thu Jul 08 2021