Liz: Hi everybody, welcome back to the Liz and Jenny show. I'm Liz, this is Jenny and this is our Know Your Options segment. We're going to talk about rolling covered call positions. Rolling the options in a covered call position.
Jenny: If you have stock in short calls against it, if you have a deep in the money call is a synthetic stock position and you have option calls against it. What you need to do … I do think we have.
Liz: I have one thing that I want to get to, it was on an e-mail yesterday but it was along the lines of covered calls. We answered an e-mail yesterday about selling near term calls versus farther term calls and both have their viable strategies. I just wanted to address this live on-air because it's easier to talk through sometimes than it is to actually write it in e-mail. Can we pull it up real quick?
Jenny: Sure.
Liz: If you're selling a near term call. This ten day, this Jan with 10 days to expiration. Let's just use the 12 line. That's about $1.92. Right?
Jenny: Right.
Liz: If that's $1.92, that's.
Jenny: 192
Liz: $192, you can sell that against that. Perfect. So what we were doing was this $1.92 versus doing something a little bit longer term. Can we take a look at the 38 day. It’s 3.25, so you can either get $1.92.
Jenny: Let me make sure it was the same strength. No, so let's just compare apples to apples. Let's do the same strength.
Liz: Yeah go to a 45 day. Go do one more. Because this will have weeklies. Then if you go to the 112. Fine here, perfect. $4.85. Great. That's why we said whatever you choose, it doesn't really matter, it's a moot point. The individual kept telling me that you can get ten dollars for the weekly roles but what you have to realize is that time will elapse and those options will be worth exactly what that front month weekly is with ten days left. If all things being equal.
Jenny: That one was how much? $1.92?
Liz: $1.92.
Jenny: On the 12. $1.92 you figure, 10, 20, 30, 40. Before you get to that 40 day cycle you've got four times of ten day cycles where you can make about $1.92. 2, 4, 6, 8.
Liz: Yeah, 1, 2, 3, yeah 4.
Jenny: Yeah.
Liz: About 4 times $1.92, dollar nine two, dollar nine two, dollar nine two, so that's seven dollars or so.
Jenny: Yeah, you're giving up just a little by going out and selling the 45 days for 6, 5 dollars, maybe you're giving up a dollar.
Liz: You got to remember you're paying for the roles each time, and things like that. It's not as out there as you would think it is. You have to remember what the future value of that option is. You can't add up all the 112 lines going out.
Jenny: Well yeah, and I mean if volatility's high I'm more likely to sell something that's a little further out in time because [inaudible 02:47] in the back month. It will be effected most by an increase or decrease in volatility. If volatility's high I'm more likely to sell this, if volatility's low I might be more likely to sell something a little bit closer.
Liz: We will sell a little bit closer, but those weekly … As long as I've been doing this, selling those weekly options. Those weekly options, just the one week one week one week one week one week. I do it on some products, but at the end of the day, it's not a gaining of the system. There's no arbitraged situation where you're making an exorbitant amount, weeklies versus the monthlies. Unless there's a giant vol differential.
Jenny: We talked about this yesterday, and we did say it depends on the product, on the volatility, it depends on the position I'm in. If I'm in a position where I bought my stock so much higher than where it is right now. I may use the weeklies to try to get in and out quickly before the product runs up through my call. Or go really far out in time so I can get my strike pretty far up.
Liz: Exactly, because then you go farther out and get farther away.
Jenny: Yeah, so.
Liz: There was, I just wanted to discuss that real quick. Then now we want to talk about how you would roll an individual covered call position.
Jenny: If you have a covered call and it's coming to expiration. Your short call is about to expire, what do you do? Especially, people always want to know what do I do if my calls in the money. Here at GLD I have a covered call position in GLD and my short call is the 118 that's going to expire this week. GLD's trading 118.84, so that short call's in the money, my stock would be called away from me.
Liz: Let's go to your expiration cycle if we can. There's two ways to look at this. Number one, if you are along the stock and have sold the 18 call against it. You chose the 18 call and you have capped your gains at 118 for this amount of time. This is what you want. I just want to put this out here, that is what you want, if every time you put out a stock position and it got called away from you. That is the maximum profit potential at expiration for this time frame.
Jenny: Right, it's what you wanted to happen. When I sold that 118 call against my GLD position. GLD was around 115 and I said to myself, if this gets to 118 I'll be so happy.
Liz: Yes. But exactly.
Jenny: Now it's at almost 119, and I'm not so happy.
Liz: You're not so happy. Well that's just it, if you love it here, you're going to like it here. I mean you're still happy. You made your maximum profit potential for when you made that decision. You decided what your maximum profit potential was going to be for that time frame.
Jenny: What do I have left to make. 50 cents. There's 50 cents left in extras of value in that 118 line. That's what I have left to make if I hold it the next three days. What I would do if I want to continue this bullish position, I'd look to rolling that out into February. Or I take my profits and just close it. You know with the run that golds had lately I'm not going to wait for that fifty cents.
Liz: No, I mean but you have to make sure you're going to get more than fifty cents by rolling it.
Jenny: Oh and you definitely, I mean …
Liz: That's something worth looking at because sometimes you can't.
Jenny: Oh yeah, sure, certainly, if there's fifty cents left in this you don't … This is a good it's been up over the last few days, if you roll now you're going to be able … People never know what to do, they say well, I don't my stocks going to get called away from me and I don't want it to get called away from me. I'm short the 118 call and it's trading almost 119 and I don't know what to do.
Liz: The only thing I would say is that you do want your stock to get called away from you. If this is your first time you can always look to reestablish or things like that. You can roll out in time or up. Up, and out. I wouldn't necessarily say up in the same cycle, but up and out in time is always a viable option.
Jenny: Up, and out. This is what I did with mine yesterday. Bought back my 118 call that I was short and thought … We were talking to Slim and I heard Slim say, “Oh, this is doing some type of head and shoulders breakout, this is going to continue to go up.” I thought, “You know what, maybe I still want to hold this position, maybe I still want to be bullish in here.” I'm going to roll out in time and see if I can get a better strike than the 118, and collect some money to do it.
Liz: Great. Let's look at it. That's the only way I would do this is if you can roll up and out in time. You can stay to your same strike but you have to make sure you're getting a lot of extrinsic value for it. Which is two dollars.
Jenny: I had the 118. I can go up to the, you can move it up to the 119, 120. Here lets the 120, even the 121 go back to a 65% probability out of the money.
Liz: What were you paying for the 118?
Jenny: 120 something.
Liz: Perfect, so you can sell the 121. What happens here is even though net net the credits may wash out, what you're getting is 3 dollars in room to the upside.
Jenny: If you're not getting any credit, you're not reducing your cost basis at all. If you're getting some credit you're helping to reduce your cost basis. I would like to get some credit, and then you're giving yourself a better chance.
Liz: Even if you were ultra bullish. Like say somebody listened to Slim and said I'm bullish on this, I capped my gain at 118. Even if I'm going to pay a little bit for this but I want that, that gives, it gives you more profit potential. It gives you from 118.77 to 120.
Jenny: If you roll to that 120, you take in about 60 cents and if you roll to the 121, you take in 21 cents. In either scenario you're reducing your cost basis. When I said it gives you a better chance I meant a better chance at making larger profits. It does not give you a better probability. Now what's at risk is all the profits you've made.
Liz: That's where the roll comes in and that's where it gets tricky when you talk about selling a call again stock. Because if you don't close that position …
Jenny: What you've made is at risk. Here, if you roll from … I would almost want to take in a little bit more. You know here you do the roll, roll the 120. You've got another two dollars in profit potential. Plus you're taking another 60 cents, so that's reducing your cost basis. What's at risk is all the profits you've made. This is only something I would do if you wanted to carry this long term bullish position.
Liz: It's interesting, this is something that we will look at in your staples. Like the major staples that are in our IRA's are something that I don't mind doing this to. I have notoriously rolled to the 118 which isn't in the money and collect as much extrinsic value as I can. Hypothetically speaking you can collect $1.60.
Jenny: I've been rolling these 92 and a half calls at Mcdonald's for quite some time now. It's 93.60 right now and I'll probably be … My calls expire in two days, I'll be rolling those calls again. I just hold my stock, keep rolling the calls and collecting the credits to roll those calls.
Liz: Right, and so that's okay just you got to remember what you're doing and there’s certain things, like you said Mcdonald's. It's Mcdonald's. You're going to, it’s okay if you roll to the in-the-moneys. This one when you roll out, further up … all are out in time, but if you roll further up it gives you a greater profit potential, but its bullish.
Jenny: It's bullish, it's bullish. If you think … it's interesting. Yesterday I did this, I rolled my 118 call to the 120 call and collected a 60 cent credit. Today I came in and said to myself am I crazy, I'm putting at risk all the money I've made in this gold position.
Liz: You rolled to the 120 yesterday?
Jenny: Yesterday I rolled to the 120. This is, let me go to a year chart. If we go to a year chart and we see okay golds had this big run up and I'm putting all this money that I made on this big run up on risk, and today I said I should just close this whole position. Those are your choices. Close position, take your profits, roll it out, and if you do it's bullish.
Liz: It is bullish.
Jenny: Right.
Liz: It's a conundrum, when you're looking at covered call positions, it did exactly what you wanted it to do. The volatility has come down, your stock has gone up, this is exactly what you wanted to do when you entered the position in cost basis. Now, Sometimes we'll look at this just like in triple q's and say, “Oh you know what?”
Jenny: This is what Slim is talking about. This must be the shoulder, head, shoulder, right?
Liz: I don't see a head or a shoulder. (laughter)
Jenny: Is this going to come up to this point and make a (noise).
Liz: He said it was poised for a breakout so that means it's got to go …
Jenny: Where's the head and where's the shoulder?
Liz: I think it's a two headed monster. Inverted. No I don't know, but he said it's poised for a breakout cause something.
Jenny: He said something about a head and shoulder breakout. Something about a head and shoulder breakout.
Liz: Did he just say that and maybe it's going to go … When they say breakout we assume up, and it's going to go sliding right back down?
Jenny: I'm going to guess … I don't know. I don't know, but in any case yesterday I rolled a 120 …
Liz: That's how good we are at chart reading ladies and gentleman.
Jenny: Today I said you know what I'm doing? I'm risking all my profits by rolling that. If this is a position in my IRA, this position in my IRA … If I want to have a long goal position on my IRA and consistently sell calls against it, there's nothing wrong with that either.
Liz: No there isn't. I don't know what GLD rank is, but another viable option is to create the put position again. Where you take your profits in the covered call and then look to see where the rank is.
Jenny: Jump back in by selling the put.
Liz: Jump back in by selling the put, or wait for a down day and jump in by selling the put.
Jenny: Right.
Liz: There's nothing wrong with taking a day or two off either.
Jenny: Yeah, right right. Absolutely. That's a cover call position where the stock has gone up through your call. Now, let's talk about what if I have a poor man's covered call where my long stock replacement is about to expire.
Liz: A poor man's covered call where your long oh that's, okay.
Jenny: We have one minute.
Liz: A poor man's covered call where your long stock is about to expire.
Jenny: My long stock replacement.
Liz: You're going to sell that out if it's worth anything because that's how you're going to reduce your cost basis and reestablish by not paying too much extrinsic value.
Jenny: Yeah, you reestablish by just buying another one for the right time.
Liz: When you set it up properly it will not stress you out, because you haven't paid too much extrinsic value to begin with.
Jenny: It's not expiring out of the money, it's expiring … It's going to be in the money and expire. You know like SLB, we're long deep in the money calls and now they're going to expire.
Liz: You sell whatever it's worth, whatever it's worth you sell and you use that money and then some to go buy something else.
Jenny: To buy something else and reestablish longer term, and then sell a call against it.
Liz: Right and when you establish if you don't pay extrinsic value it's not that big of a deal.
Jenny: It's just like stock but you're just not tying up as much capital if you're using an IRA.
Liz: That was in one minute.
Jenny: All right, we are out of time. We will be back with trade small, trade often.
Liz: So, stay tuned.