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.

Our TM calculator has 4 rows for data entry and calculation results, explained below:

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 gotten on the trade.

The 2nd Row shows you the immediate profit or loss in closing out the position and selling the stock. Simply click the Update [U] button on the second row to update prices and automatically calculate the result of unwinding the trade.

If you are contemplating a roll of the short calls, you must update the second row, because the 3rd and 4th Rows of the calculator work from the 2nd Row's data in order 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:

These assumptions are necessary, since we can never know where the stock price will be at expiration. Note that the 3rd and 4th Rows work off the numbers in the 1st and 2nd rows in making the roll calculations. The return calculations in the 3rd and 4th Rows work include any increase (or decrease, as the case may be) in stock price, thus if the stock falls after the roll, this part of the roll return will evaporate.

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 value of the position at any point in time. For more information, view 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 and breakeven) after running the trade is $39.95, which also is shown in the calculator's 1st 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 3rd 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. Put differently, we gained $1.05 in net premium on the roll (2.55 original premium + 2.50 for selling the new call, minus 4.00 cost to buy back the original call).

The 3rd row shows us a potential return on the roll of $4.80 and $6.05 if we are called out of the stock at the higher 47.5C strike, if the stock price does not change before expiration. Again, note that much of this potential return comes from the stock's price advance from $42.50 to $46.25, because we will only pick up a net of $1.05 on the roll. However, should the stock fall after we roll up, we would be protected down to our new cost basis of $41.45.

You can see in the following illustration how the calculator's 3rd Row works off of the data in the 1st and 2nd Rows and incorporates assumptions (a) and (b) explained above:

Calculator Position 1

Note: You could close this trade right away for a return of $2.30 (5.4%). In making a decision to modify a position, always do a "gut check" to decide if you would prefer to stick this profit in your jeans or go for a yet higher return by rolling up - which, in order to work, requires that the stock at the very least hold its new price through expiration.

It appears profitable in this example to roll up to the 47.C, 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. But if the stock price comes back down, we will simply have written a price spike and we will be whipsawed.

But let's say we are confident in the stock, so let's assume we effect the roll up to the 47.50 Call at the prices shown in the 3rd Row. We have now modified the trade and now have a higher cost basis of $41.45 and stand to make a much larger return. The 3rd Row of the calculator presents the new flat and if-called returns for the roll in the 3rd row, and now governs our return calculations.

Of course, should we decide to close the trade or modify it again, the calculator will not work off the new 3rd Row numbers. The 3rd row shows a potential roll, but we have actually done that roll. How do we adjust the calculator to show the new price dynamics?

After the Roll: Modifying the Calculator Data

The 1st and 2nd Rows of the calculator no longer accurately reflect our position, and we cannot use it to look at unwinding the trade, or to evaluate another roll. To do this, we must either revise this position or (better yet) enter a new position in the calculator that incorporates the new position numbers.

We bought the stock for $42.50 and wrote the 45C for $2.55 in premium. Now we have increased our cost basis, but also our net premium and potential profit.

To recap, our potential profit on the roll uncalled is $4.80, and the potential return assigned is $6.05. As noted above, these numbers include the $3.75 appreciation in stock from $42.50 to $46.25. Adding this $3.75 in additional stock value to the $1.05 in net premium on the roll gives us the $4.80 return. If called at $47.50 (the new call strike), we will pick up an additional $1.50 - the difference between the current $46.25 stock price and the 47.5C strike, which produces the $6.05 return if assigned (4.80 + 1.25).

The solution is simple and elegant: we open a new calculator position (it has memory for 24 separate positions) for the new, adjusted position. To do this, check any of the 24 position tickboxes on the calculator that are not being used. We merely enter the following five pieces of data from the original calculator position into the 1st row of a new calculator field (Calculator Position 2), like so:

In other words, we enter the new call symbol and strike, and the stock's price at the time of the roll, whioh includes an unrealized profit. We also enter the new $4.80 "premium" amount, which is the $1.05 sum of the net call transactions to date and the $3.75 of unrealized profit in the stock.

The net of the option buys and sells from the !st, 2nd and 3rd Rows of the calculator is $1.05, which includes the 2.55 original premium, 4.00 buyback cost and 2.50 roll premium.

If it seems complicated, it really isn't. 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:

All these numbers are contained in the original calculator position for the trade. 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.

What if we were instead rolling out on a flat stock price or rolling down on a decreased stock price? We would do exactly the same, but the net premium on the roll and the change in stock price might be a negative number.

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 (breakeven) 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, thus 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 an unwinding of the trade or a subsequent roll at any time.

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.