Covered Call Calculator for Rolling Calls 
Handling Multiple Covered Call Rolls with our Calculator 
By John Brasher, CallWriter Publisher

In this issue we take a look at using a proprietary CallWriter tool - our Trade Management Calculator™ - rolling calls up in a covered call trade. If you're a Callwriter member, this article will help you get more out of our covered call calculator. If not, it still will give you some great insight into covered call rolls. You can try out the Trade Management Calculator™ and our other unique tools and features risk free.

Rolling Calls with our Covered Call Calculator Rolling the calls in a covered call trade means to buy back the short calls and sell calls with a different strike price. Rolling calls is a trade management technique used to increase return when the stock advances or ameliorate a loss when it declines (or actually snatch a profit out of a declining stock). We invented the Trade Management Calculator™ to manage the covered call trade all through its life, from open to close, including rolls. You have to absorb this article in order to understand how this calculator works, because no one else anywhere has this calculator. Do you have to have this calculator in order to roll calls, or to manage covered call trades? No, but it sure makes life easier for covered call writers. Even if you are not a CallWriter member, though, this article will help you with the process of rolling calls and keeping track of the numbers. Our fascinating little covered call calculator has 4 rows, explained below: Row 1   Original trade prices and basis (or adjusted numbers after a roll) Row 2   Immediate results of closing the position (current prices) Row 3   Potential results of a rollover Row 4   Potential results of an alternative rollover The first thing upon executing the trade, enter the stock and option symbols and the actual trade numbers into the calculator's 1st row based on the fill we got for the trade. Then, when the stock price moves up or down and we are contemplating closing the trade or possibly doing a roll, we go to the 2nd row and enter the new stock price (Current Price) of $46.25 and the $4.00 asked price to repurchase the short call. There is no need to look up prices; just hit the update button to get 15-minute delayed prices. If we want real-time prices, we have to look that up. The 2nd rows shows you the immediate profit or loss in closing out the position and selling the stock. It is essential to enter these numbers into the 2nd row, because the 3rd and 4th rows of the calculator work from these prices to compute the rollover results. I frequently go through my calculator positions and check each one by hitting the 2nd row update button to see if the trade is showing me a profitable close. Note: When I open a trade, I normally enter the option symbol in the 3rd row for the strike immediately below the one written, and in the 4th row enter the option symbol for the strike immediately above. The 3rd row is a possible rollover (up or down), and the 4th row is another possible rollover (up or down), which allows you to look at two different roll possibilities at once. The 3rd and 4th row calculations assume that the stock price (Current Price in the 2nd row) doesn't change by expiration and that either: (a)   an OTM or ATM call expires worthless and you sell the stock to get the flat return,   or (b)   you are assigned (called out) of an ITM call and receive the if-called return These assumptions are necessary, since we can never know where the stock price will be at expiration. The 3rd and 4th rows work off the numbers in the 1st and 2nd rows in making the roll calculations. Unless and until you execute a subsequent roll into a different call, the 1st row [$39.95 Cost Basis] remains the baseline for the trade, and the 2nd row establishes the cost of the roll. It might be of assistance to look at our sample calculator with tutorial. Initial Roll Example Let's work through an example using hypothetical stock XYZ. Assume that we've bought XYZ for $42.50 and written the 45 Call on it for a $2.55 premium. We would enter these figures, along with the stock and option symbols, into the calculator's 1st row. Your Cost Basis in the stock (net debit) after running the trade is $39.95, as shown in the calculator's first row. Now assume that a week later the stock's price goes up to $46.25 and you are considering a roll up to the 47.50 call (that is, buying back the 45 Call and selling the 47.50 Call). It will cost $4 to buy back the 45 Call, and you'll get $2.50 for writing the $47.50 call. Rolling up to the 47.50 Call will increase the Cost Basis to $41.45, as shown in the calculator's third row. Once we roll into a new call, our basis in the stock is adjusted, due to buying back the original call and selling the new call - rolling will always change our basis. It appears potentially profitable in this example to roll up, because even though it will increase our cost basis in the trade, we're setting ourselves up for a substantial increase in the return... if the stock price holds; if the stock price comes back down, we'll get whipsawed. After completing the roll up to the 47.50 Call, we are now in a different trade with a higher basis, and the calculator presents the new flat and if-called returns for the roll in the 3rd row, the same as it did for the original trade in the 1st row. Note: You could close this trade right away for a return of $2.30 (5.4%). Is it really worth the effort to roll up in this example? Sometimes it is better to take your money off the table and find a new trade (and turn your cash). You can see below how the calculator works off of the stock basis and assumptions (a) and (b) explained above. Here is a sample calculator illustration that includes our hypothetical trade and roll: Calculator Position 1 Subsequent Roll Assume that the price has increased again to $49, and we believe the advance will continue. How do we use the calculator to evaluate another roll? We cannot use the 3rd row of Calculator Position 1 for a subsequent roll after doing the first roll, because the 3rd row works off the 1st and 2nd rows, and the 2nd row works off the 1st row, both of which are now obsolete in light of the initial roll. The solution is simple and elegant: we just open a new calculator position to hold the subsequent roll (it has memory for 24 separate positions). To do this, check any of the 24 tickboxes on the calculator that are not being used. We merely enter the numbers from the original roll into the 1st row of a new calculator field (Calculator Position 2), like so: Data to be Entered in 1st Row of Calculator Position 2 Stock Symbol   XYZ Stock Price   New stock price at the time of the original roll (46.25) Option Code   Option symbol for the strike we're rolling to (XYZKW for the 47.50 strike) Strike Price   Strike price of call we're rolling to (47.50) Premium   Net premium (original premium, plus roll premium, less buyback cost) + increase in stock value (4.80) We cannot just take the 3rd row numbers from Calculator Position 1, however, and paste them into the 1st row of a new calculator (Calculator Position 2). The reason is that the proper starting Premium number for the adjusted position in Calculator Position 2 (1st row) must be manually arrived at by the trader. Thus the 5 pieces of data above must be manually entered into the 1st row of Calculator Position 2. We must manually calculate the "net premium" and enter it in the Premium field of Calculator Position 2, but this is the only calculation we have to make by hand (it only takes seconds to do). Don't complicate this simple computation in your mind; its only purpose is to reflect your newly-adjusted cost basis resulting from the original roll and to take into account the increase in the stock's value and the net premium received on the roll. Here is a more detailed example of how how to calculate the net premium (for the Premium field) in Calculator Position 2 based upon our original roll: Calculating the Net Premium Original Premium   + 2.55 Premium on Roll   + 2.50 Increase in Stock Value   + 3.75 ($46.25 stock price when roll done - $42.50 original cost) Cost to Buy Back Calls    - 4.00 Net Premium   + 4.80 Here is how Calculator Position 2 for the XYZ trade would look after the original roll and making the simple net premium computation: Calculator Position 2 The return percentages are slightly off - lower - than actual returns would be, because we are presenting the end result of several chains of calculations in the 1st row of Calculator Position 2 as if they were original trade entry numbers. But the dollar amounts of the returns are accurate. Obviously, the trade has increased the Cost Basis $1.05, from $39.95 to $41.45, which is an increase in trade risk. The potential returns shown include the $3.75 increase in the stock price from $42.50 to $46.25, and realizing the $4.80 flat return or $6.05 if-called return depends on the stock's price at expiration. Once these numbers have been entered into the 1st row of Calculator Position 2, we can look at a subsequent roll at any time as prices change. If you are not a CallWriter member and don't have access to our calculator, you can still calculate closing and roll returns yourself by hand. Manual ciphering is clumsy, tedious and prone to mistakes (that's why we invented the calculator), but the math is not difficult to do. Rolling calls in covered call trades is not difficult to accomplish, and the returns are easy to calculate and keep up with. Rolling calls down is the same process, using dropping stock prices instead. Our CallWriter members site contains extensive tutorials on using our Trade Management Calculator™, including rolls up and down. Note:  Always keep in mind that the returns shown in the Trade Management Calculator™ are potential returns only, because results always depend on prices realized upon trade conclusion. Also, the calculator does not take trade costs into account, which can materially affect returns where only one contract or a few contracts are run. This issue's Question and Answer: Exercise of In-the-Money Calls Question:   I have heard that stock options must be in the money at least $0.25 for them to be exercised. Are there any rules on this - when can I expect to be assigned on an option that is only slightly in the money? Answer:  There really is only one rule: if the option is $0.75 or more in the money (ITM) at expiration, it will automatically be exercised for the holder's benefit by the brokerage. The only way to avoid this, should the holder not want to exercise, is to advise the broker in advance not to exercise it. (In that event, if you do not exercise it, your broker can do so, and keep the profit.) But when the option is ITM less than that amount, no rules apply, except rules of thumb. You can certainly expect that an option at least $0.25 ITM will be exercised. Keep in mind that professional traders (market makers, institutions, etc.) have no trading costs. Thus if the option is even a few pennies ITM they will exercise, because it is profitable for them to do so, where it would not be feasible for most individual traders to exercise. A large open interest of several thousand contracts or more indicates the presence of professional traders, so in this situation expect to be called out of stock if any calls written on it are ITM more than a few cents.