That’s because I will share with you a very simple, yet effective way to roll your Covered Calls.
And if you’re a busy person with little time to spend looking at your trading applications, or brokerage software…
Or, if you just don’t have the time to look through all the charts of your Covered Call positions…
Then you will like this method because all you need is just a few minutes to know whether it’s time to roll your Covered Call or not!
So what is this method of rolling Covered Calls?
It’s by using one of the Option Greeks – Delta.
What Exactly Is Delta In Options?
By definition, Delta measures the rate of change in an option’s theoretical value per $1 in the underlying security.
Bullish Option Strategies have positive Deltas.
Here’s an example.
Let’s say you bought a Call Option on Nike (Ticker: NKE) with a Delta of 0.80 for $13.00.
If Nike goes up by $1, then your Call Option’s value would increase by $0.80 (all else being equal because there are other factors that affect an Option’s pricing as well).
So the new value of your Call Option would now be worth $13.80.
On the other hand, if Nike goes down by $1, then your Call Option’s value would decrease by $0.80 (all else being equal).
Then the new value of your Call Option would now be worth $12.20.
Next, Bearish Option Strategies have negative Deltas.
Here’s an example.
Let’s say you bought a Put Option on Nike with a Delta of -0.50 for $4.00.
When you buy a Put Option, you want the underlying stock to go down.
That’s because Put Options make money as the market drops, and lose money as the market goes up.
So if Nike goes up by $1, then your Put Option’s value would decrease by $0.50 (all else being equal).
That makes the new value of your Put Option $3.50.
And if Nike goes down by $1 instead, then your Put Option’s value would increase by $0.50 (all else being equal).
So the new value of your Put Option would be $4.50.
Now, what about Covered Calls?
Do Covered Calls have a positive or negative Delta?
If you were to log into your brokerage platform, you will notice that when you sell a Covered Call, the Delta is negative.
This is because a Covered Call is essentially selling a Call Option.
And when you sell Call Options, it has a negative Delta (the opposite of buying Call Options).
But the Covered Call strategy is actually a Bullish strategy.
That’s because you want the underlying stock to go up so your overall stock position will be profitable.
So overall, the Covered Call strategy has a positive Delta.
That’s because the Covered Call strategy has two components:
- Short Call Option (with negative Delta)
- Long 100 Shares (with 100 positive Delta)
Hence, the overall Nett Delta is positive.
Why Use Delta To Roll Covered Calls?
So why do I like using Delta to roll my Covered Calls?
First of all, Delta is a very simple metric that can be used to monitor multiple Covered Call positions all at the same time.
And if you’re like me and have many multiple Covered Call positions, then you know how much of a hassle it can be to look at the chart of each of the underlying stocks.
Secondly, by looking at the Covered Call’s Delta, I’d know immediately if I need to roll it or not.
And because of that, there’s no need to look at charts.
To be able to use Delta properly, you’d need to understand what the Delta number means in relation to your Covered Call position.
Covered Calls below -0.50 Delta
If your Covered Call has a Delta that’s below -0.50, then your Covered Call is Out-of-The-Money (OTM).
That means the underlying stock is still below the strike price of your Covered Call.
This also means that there’s no need to roll your Covered Call at the moment.
And if your Covered Call remains Out-of-The-Money at expiration, then it will expire worthless and you get to keep the full credit you received for selling the Covered Call.
Covered Calls at -0.50 Delta
Now, if your Covered Call has a Delta of -0.50, then your Covered Call is At-The-Money (ATM).
That means that the underlying stock has climbed up to your Covered Call’s strike price.
And at this time, you might want to consider rolling your Covered Call if you do not want a chance that it could get exercised.
If your Covered Call gets exercised, that means your stock would get called away.
Covered Calls above -0.50 Delta
Finally, if you see that your Covered Call has a Delta that is higher than -0.50, then you know your Covered Call is In-The-Money.
That means the underlying stock has gone above your Covered Call’s strike price.
At this point in time, there is an increased chance that your Covered Call would get assigned (even before the expiration date).
And if you want to decrease the chances of that happening, then you definitely want to roll your Covered Call at this point.
So as you can tell, just by looking at the Covered Call’s Delta, you’d be able to very quickly identify which ones you need to be rolled and which ones you can leave alone.
When To Roll Your Covered Calls
So when do you roll your Covered Calls?
This comes down to your objective and there are, in general, two objectives.
Objective #1: You want to hold on to the stock
You might like the stock a lot and you want to hold onto it as a long-term investment, and not sell it.
If this is the case, then this is what you want to do…
If the Delta of your Covered Call is below -0.50, you have three options:
- Option 1: Do nothing.
- If it stays Out-of-The-Money at the expiration date, it will expire worthless and you keep the full credit received.
- Option 2: Take profit.
- If your Covered Call is already in profit, you can consider closing it if it has gained at least 50 percent in profit. Then once you close it, you can wait till the stock goes up again before selling another Covered Call.
- Option 3: Roll down.
- If you’re a little aggressive, you can choose to roll your Covered Call down to try and get more premium. This is to help cushion any loss in the underlying stock, especially if the stock is tanking hard.
If the Delta of your Covered Call is at -0.50, then you want to Roll Out & Up for a credit, or at least a breakeven.
Rolling Out & Up simply means to roll to a further expiration date and to roll to a higher strike price.
In the image above, you can see an order ticket I did to roll my Covered Call.
In this order ticket, you can see that I Rolled Out from 15 Oct 21 to 19 Nov 21.
And I also Rolled Up my strike price from 150 to 155.
This is all done in a single order ticket.
And I managed to receive a credit of $0.72 for rolling this Covered Call.
That means I pocketed $72 in premium.
On top of that, because I rolled to a higher strike price by 5 points, I’m giving room for the underlying stock to go up by those 5 points.
That means if the underlying stock closes above 155 at expiration, I’d have gotten an additional 5 points in capital gains compared to if I had not rolled my Covered Call and left it at 150.
A fantastic deal in my opinion!
Objective #2: You don’t mind having your stock called away
Now, what if your stock has already gone up a lot and you’re thinking of taking profits on it?
Or maybe, the stock doesn’t seem to be going anywhere and you want to quickly get out of the stock so you can use the funds for another stock?
In this case, this is what you would do…
If the Delta of your Covered Call is below -0.50, you have three options:
- Option 1: Do nothing.
- Option 2: Take profit.
- Option 3: Roll down.
If you noticed, this is exactly the same as what you’d do in Objective #1.
So if your Covered Call is Out-of-The-Money, your actions would be the same.
The only difference for this objective is that you can let the Covered Call get Deep-In-The-Money to a Delta -0.80 before you start rolling.
That means the underlying stock would have gone above your Covered Call’s strike price.
So why do we wait until the Delta gets to -0.80 before we consider rolling?
That is because when the Delta gets to -0.80 and above, most of the Extrinsic Value in the Option would be gone.
That means there’s nothing much left to earn from the Option in terms of Extrinsic Value.
When the Option’s delta gets to -0.80, most of the Option’s value comes from Intrinsic Value.
As a Covered Call seller, our goal is to extract all the Extrinsic Value we can get from the Option.
And since there’s not much Extrinsic Value left to extract, this would be the best time to roll your Covered Call.
Therefore, if the Delta of your Covered Call is above -0.80, you have two options:
- Option 1: Leave it to have your stock called away.
- You might choose to just let your stock get called away because it already seems pretty Overbought and you don’t think it can go any higher.
- Or, you might not be able to roll your Covered Call for any meaningful credit, so it’s better to just have your stock called away.
- Option 2: Roll Out & Up for a credit or for breakeven.
- If you’re able to roll to the next higher strike price and to a further expiration date that gives you a credit or at least a breakeven, then you want to do that.
- By doing so, you’d be able to potentially increase the capital gains on the underlying stock if it stays In-The-Money at expiration.
How I Manage My Covered Call Positions
So I’m going to walk you through exactly how I manage my Covered Call positions.
This way you can do the same for yours as well.
In the above image, you can see that these are all my Covered Call positions.
As you can tell, I have quite a number of Covered Call positions!
It would be very tedious to go into each of the stocks’ charts and determine whether or not to roll my Covered Calls.
Instead, I simply take a look at the Delta (in the green box).
From there, I would immediately know whether I should roll or not.
So the first thing I’d look at is the Covered Call positions that are -0.50 and above.
If you see in the image above, there are two stocks that have gone above -0.50 Delta.
So these two stocks immediately get my attention first.
Then I’d take a look at what these two stocks are.
They are ITA (U.S. Aerospace & Defence ETF) and BABA (Alibaba Group Holding Ltd).
Then I ask myself, “Do I want to keep these stocks, or am I okay to let them go?”
If the answer is to keep these stocks, then I want to roll my Covered Calls now.
But if the answer is that I don’t mind letting them go, then I’d wait till it gets to -0.80 Delta before considering to roll.
Once I’ve made my decision on those two stocks, then I move to the rest of the Covered Call positions that are Out-of-The-Money.
Most of the time, any Covered Call positions that are in between -0.10 Delta and -0.50 Delta, I leave them alone.
As for the Covered Call positions that are below -0.10 Delta, I will consider either closing them, or Roll Down.
This depends on how much time there’s left in the Option.
For example, if I sold the Covered Call with DTE 30 and I’ve already made 50 percent profit on it with 20 days left to go till expiration…
Then I might just close the Covered Call.
That’s because it makes no sense that I wait another 20 days just to realize the remaining 50 percent in premium when I already made the first 50 percent in 10 days.
I’d be risking that 50 percent I’d already made if the stock was to rally.
As the saying goes, “A bird in the hand is worth two in the bush!”
But if the stock had dropped rather significantly, then I would consider Rolling Down to get more premium to cushion the drawdown in the underlying stock.
But I never Roll Down below the price that I bought the stock at.
For example, if I bought the stock at $100, then I would never roll my Covered Call below $100.
That’s because if I rolled below $100 and the stock was to rally, then I could get caught in a situation where I’ve locked in my losses.
Then you would be kicking yourself in the you-know-where!
Alright, there you have it!
That’s how I manage your Covered Call positions and now you can do the same for yourself.
So do give it a try and let me know in the comments below how it went for you!
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