A good covered call calculator will help you answer the question: “Should I roll my position” for an existing covered call position. Your covered call calculator should include important variables like: the bid/ask spread, the time premium remaining, earnings release dates, and ex-dividend dates.

What does rolling a covered call mean?

Rolling a covered call position means you buy back the option portion of the position and then sell a different option (either a different strike, or expiration month, or both). You will need to consider that you have to pay the asking price when you buy back the existing option, and receive the bid price when selling the new option. You may do slightly better with limit orders that split the bid/ask but most calculators will assume you pay the asking price and receive the bid, according to most option trading articles.

Example of rolling a covered call

Let’s say you have 100 shares of Apple Inc. (NASDAQ: AAPL) that you purchased a month ago for $312 a share. You also sold an AAPL Jan 300 Call for $23 that same day. This is your situation now:

Since you opened this position AAPL has gone up to $324.77 and the call has lost time premium. Here’s your return if you closed it using recent prices:

So this is a money maker if you close the position. However, you can increase your profit on this trade even more by rolling the option to a higher strike price. (You may not want to roll out to February because AAPL has an earnings release during that month.) But you could roll up to the Jan 310 strike from the 300 strike you have today. You would do this by buying back the Jan 300 option and then selling the Jan 310 option. Your covered call calculator should show you the difference like this:

The top row shows that you will have to pay $2,755 to buy back the Jan 300 option, and the middle row shows that you will receive $1,940 for the Jan 310 option. The bottom row shows that this rolling will cost you $815, the difference between $2,755 and $1.940.  But your overall profit is increasing by $185 due to owning AAPL stock, and because you have raised the strike price by 10 points. (This assumes that AAPL stays above 310 through the January expiration.)

Ideally, your covered call calculator will let you compare many different options at the same time, and also warn you about earnings release dates and ex-dividend dates within each option cycle. Please visit Borntosell.com for a color-coded covered call calculator that includes these possibilities.

Using a covered call calculator that has automatically updating prices, integrated earnings release dates, and ex-dividend dates is a huge time saver. This kind of calculator will help you optimize the time premium you receive each month, as well as keep you out of trouble by keeping you aware of important dates. The old way of using a spreadsheet with incomplete and non-updating information typically leads to sub-optimal results.

This article is by Mike Scanlin, CEO of Born To Sell, www.borntosell.com, a web site dedicated to helping people earn monthly income from selling call options.