The Ultimate Guide to Rolling Covered Calls

If you’ve ever sold a Covered Call before, then you know it can be rather confusing when it comes to rolling Covered Calls.

For example, you might be wondering:

• When do you roll your Covered Call?
• Which expiration date do you roll your Covered Call to?
• Should you roll up or down?
• Should you even roll your Covered Call?
• What happens if my Covered Call gets in-the-money?
• Will my Covered Call get exercised?

If you have been asking any of these questions, then don’t worry.

In this post, I will share with you everything you need to know to roll a Covered Call.

So that by the end, you will know exactly what to do with your Covered Call and become a master at rolling Covered Calls.

Let’s get started!

What Does Rolling A Covered Call Mean?

Rolling a Covered Call consists of doing two things simultaneously:

1. Buying back your existing Covered Call.
2. Selling a new Covered Call.

And you can do this in one order ticket as opposed to doing it as two separate transactions.

Here’s an example:

Let’s say you sold a Covered Call on IBM 30 days ago with a strike price of 160.

And the premium you received for selling this Covered Call is $1.00.

Today, this Covered Call is only worth $0.10 with 10 days left to go until expiration.

Seeing that the Covered Call doesn’t have much premium left, you decide to sell a new Covered Call.

The new Covered Call you’re looking at is at the same strike price of 160 and has 45 days left to expiration.

And the premium you can get for selling this new Covered Call is $1.60.

To roll, you simply buy back your existing Covered Call for a debit of $0.10.

And then you sell the new Covered Call for a credit of $1.60.

This will give you a net credit of:

$1.60 – $0.10 = $1.50 credit

 So the total amount of money you received will be:

$1.50 x 100 shares = $150

We multiply by 100 shares because each option contract controls 100 shares.

So if we add up the credits we received from selling the first Covered Call and from subsequently rolling it into a new Covered Call, we will receive a total credit of:

($1.00 + $1.50) x 100 shares = $250

The total credit received is $250.

So essentially, the process of rolling a Covered Call is simply buying back an existing Covered Call and selling a new Covered Call.

Different Types of Covered Call Rolling

The next thing to understand is that there are different types of rolls:

• Rolling Out
• Rolling Down
• Rolling Out & Up
• Rolling Out & Down

These are the different terminologies that are used when it comes to rolling options, and you want to be familiar with them.

Rolling Out

Rolling Out means to roll to a further expiration date.

For example, rolling from the October expiration date to the November expiration date:

In the screenshot above, you can see that I bought back the Covered Call expiring on 15 Oct 21 with a strike price of 150.

And simultaneously sold the Covered Call expiring on 19 Nov 21 with a strike price of 150.

For this type of roll, we keep the same strike price.

And this gives us a net credit of $1.72, which is $172 in premium collected per Option contract.

Rolling Down

Rolling Down means rolling to a lower strike price.

For example, rolling from the 150 strike price to the 145 strike price.

When rolling down, we roll within the same expiration date.

When doing this, we are able to receive a net credit of $0.95, which is $95 in premium collected per Option contract.

Rolling Out & Down

Rolling Out and down is the combination of two different types of rolls.

That means rolling out to a further expiration date, and rolling to a lower strike price.

So for example, rolling from 15 Oct 21 with a strike price of 150, to 19 Nov 21 with a strike price of 145.

For this roll, we received a net credit of $3.49, which is $349 in premium collected per Option contract.

Rolling Out & Up

The final type of roll is Rolling Out and Up, which is the combination of two different types of rolls as well.

That means rolling out to a further dated expiration date, and rolling to a higher strike price.

So for example, rolling from 15 Oct 21 with a strike price of 150, to 19 Nov 21 with a strike price of 155.

For this roll, we received a net credit of $0.72, which is $72 in premium collected per Option contract.

If you noticed, there isn’t a “Rolling Up”.

That’s because for Call Options, rolling up will create a net debit instead of a net credit.

As the strikes go higher, the Call Options are worth lesser as it’s further out-of-the-money (OTM).

So if you Roll Up your Covered Call, you will be buying back at a higher price than what you’re selling the higher strike Covered Call for.

That is why rolling up will become a net debit.

And in general, we always want to roll for a credit or at least for breakeven.

When to Roll A Covered Call

So when do you roll a Covered Call?

There are 3 scenarios where you want to consider rolling your Covered Call.

Scenario 1: Your Covered Call is almost worthless

If your Covered Call has moved further out-of-the-money (OTM) compared to when you sold it, then chances are that your Covered Call may be worth very little.

For example in the chart above, if you sold the Covered Call at the strike price of 165 with 45 days to expiration (DTE 45) when the stock was at $160…

Then now that the stock has dropped to below $150, chances are that your Covered Call would be worth lesser than when you sold it.

And this is the time when you might want to consider rolling it.

You also want to roll it when you’ve realized most of the profit for the Covered Call and there’s still lots of time left before the expiration date.

For example, if you sold the Covered Call for $1.00 with a DTE 45 and now it’s worth $0.20 with a DTE of 30…

Then you want to consider rolling it, or just close it out to realize the $0.80 profit.

That’s because if you’ve already gotten a profit of $0.80 in just 15 days, it makes no sense to hold onto the Covered Call for another 30 days just to realize the remaining $0.20.

If the stock were to suddenly rally, then you would give back the $0.80 that you could have closed out for a realized profit.

So it’s a better move to either close out for a profit and wait for the stock to go up again before selling another Covered Call, or to roll it.

If you choose to roll, you can either:

• Roll Out to a further expiration date
• Roll Down to lower strike price
• Or, Roll Out and Down to a further expiration date and a lower strike price

Scenario 2: Your Covered Call is At-The-Money (and you don’t want to get assigned)

The next scenario where you can consider rolling your Covered Call is when the stock price has gone up to your strike price and your Covered Call is now at-the-money (ATM).

This is actually considered a good scenario because your underlying stock is making money since the stock has gone up.

For example, you might have bought your stock at $2,200 and sold the Covered Call at the strike price of $2,500.

And since your Covered Call is now ATM, it means the stock has gone up to $2,500.

That is $300 in capital gains per share!

But this is also where many investors get worried because they think that the stock can go even higher, and they don’t want to just settle for the $300 profit.

In this case, if you don’t want to risk your Covered Call getting assigned and having your shares called away…

Then this is when you want to consider rolling.

And the roll to do here is to Roll Out and Up to a further expiration date and to a higher strike price for either a small credit or breakeven.

This will give more room for your stock to go up and increase the capital gain as well.

Scenario 3: Your Covered Call is In-The-Money

The last scenario is when the stock has already gone above your strike price and your Covered Call is now in-the-money (ITM).

If you’ve somehow allowed the stock to run up past your strike price…

Then there would be an increased chance that your Covered Call could get exercised and have your stock called away.

This is when you want to consider rolling.

The roll you would do here is the same as scenario 2, which is to Roll Out and Up to try and get more capital gains to the upside.

However, because your Covered Call is now ITM, you wouldn’t be able to roll to a higher strike price than compared to if your Covered Call is ATM.

That’s because the extrinsic value is the highest ATM which allows for a higher transfer of extrinsic value to the following expiration date.

When an Option is ITM, there is lesser extrinsic value to be carried over to the further expiration date.

Hence you won’t be able to roll to a higher strike compared to if your Covered Call is ATM.

However, there’s always the chance that the stock comes back down below your Covered Call strike by the expiration date.

And if it does, your Covered Call would expire worthless and you would keep both your stock and the premiums collected.

3 Systematic Methods to Roll Covered Calls

If you’re like me and you have many Covered Call positions to manage, then you want a systematic approach to managing your Covered Calls.

Otherwise, you’d be confused and may end up missing a roll when you should be rolling your Covered Calls.

So there are 3 systematic methods that you can use to manage your Covered Calls.

And with these methods, you will know exactly when and how to roll them.

Method #1: Rolling Covered Calls Based on DTE

The first method is to roll your Covered Calls based on DTE.

This is the most passive and easy way to identify when you should roll.

If you are busy and have no time to stare at your brokerage platform for hours at a time, then you want to use this method of rolling your Covered Calls.

For this method, we simply look at how many days left there are before your Covered Call expires.

For example, you might want to consider rolling your Covered Calls at DTE 21.

So regardless of where the stock price is, you just roll your Covered Call.

And DTE 21 is a good time to roll your options.

Because even if your Covered Call is ITM…

There’s a very low likelihood of it getting exercised as there should still be some extrinsic value left in the Option.

The only time when your Covered Call is in danger of getting exercised is when there’s little to no extrinsic value left.

And that’s usually when there are not many days left to expiration.

However, you do want to be aware of Dividend Risk.

That’s when the stock is about to pay out a dividend and the dividend is more than the extrinsic value left in the option.

For example, if there’s $0.30 of extrinsic value left in your Covered Call but the dividend is $0.50 per share…

Then there’s a good chance your Covered Call could get assigned.

But you could always roll your Covered Call well before the ex-dividend date to avoid assignment.

So for this method, when the DTE is 21 this is how you would roll:

• If your Covered Call is OTM, you can either Roll Out, Roll Down, or Roll Out & Down.
• If your Covered Call is ITM, you can either Roll Out, or Roll Out & Up.

Method #2: Rolling Covered Calls Based on Percentage of Premium Made

The next method is to roll based on the percentage of profit you’ve already gained on the Covered Call.

For example, you might set it at 50 percent profit.

That means that if the Covered Call has already realized 50 percent of the premium you collected, then this is the time you want to roll.

So if you sold the Covered Call and collected $1.00 for it, then you would roll once the Covered Call is worth $0.50.

This method has a little more active management involved compared to the first method.

That’s because you do have to look at your brokerage platform from time to time to see if your Covered Calls have already realized 50% in profit.

Method #3: Rolling Covered Calls Based on Delta

The last method is to roll your Covered Calls by looking at one of the Option Greeks – delta.

This is the best way to manage your Covered Calls if you have multiple Covered Call positions.

That’s because you can know exactly whether you have to roll by simply looking at the Covered Call’s delta.

For example, let’s say you sold your Covered Calls at 20 delta.

If your Covered Call is showing 10 delta, then you know that your Covered Call is in profit.

Conversely, if your Covered Call is showing more than 20 delta…

Then you know that your Covered Call is losing money, BUT your overall stock position is in a profit.

So by looking at delta, you’re able to know whether it’s time to roll your Covered Calls, or do nothing.

In the screenshot above, you can see that these are all my Covered Call positions.

As you can tell, I have many Covered Call positions and it would be a hassle to look at each of the stock’s charts to see where my Covered Call is at.

Instead, I simply look at the delta column (in green) to determine whether it’s time to roll my Covered Calls or not.

I arrange the deltas in descending order so I know which are the Covered Calls that I need to pay attention to first.

Then I start by looking at the Covered Call position that has the highest delta.

In the screenshot, you can see that the first Covered Call position I have has a delta of -51.95.

That means it’s now ATM.

Next, I ask myself, “Is this a stock I don’t mind getting called away? Or is this a stock I want to keep as a long-term investment?”

If it’s a stock I don’t mind getting it called away, then I will leave it until it reaches 80 delta before I consider rolling it.

But if it’s a stock I want to hold as a long-term investment, then I want to roll it.

So all the Covered Call positions that have a delta of 50 or more would get my attention first.

Next, I would look at the Covered Call positions that have a delta of 10 or less.

These are the positions that most likely don’t have much value left, and I would consider either closing them out or rolling them.

If I were to roll them, I would either Roll Down or Roll Out and Down.

As for the rest of the positions that are in-between delta 10 and 50, I do nothing!

I simply wait for them to either go below 10 delta, or above 5o delta before I consider rolling.

As you can see, this is a really simple and quick way to assess your Covered Call positions without having to look at the charts.

Conclusion

When it comes to rolling Covered Calls, there are 4 main types of rolls you can do:

• Rolling Out
• Rolling Down
• Rolling Out & Up
• Rolling Out & Down

Then to determine when to roll, there are 3 scenarios when you would consider rolling your Covered Calls:

• When your Covered Call is almost worthless
• When the stock has gone up to your Covered Call strike
• And when the stock has gone above your Covered Call strike

In each of these scenarios, there are 3 systematic methods to roll:

• Method #1: Roll based on DTE
• Method #2: Roll based on a percentage of profit made
• Method #3: Roll based on delta

Now that you know everything there is to know about rolling Covered Calls, all that’s left is to implement what you’ve learned here!

So, which method would you use to roll your Covered Calls?

Let me know in the comments below!