I established a position in BE about a year ago at low initial price. I have sold covered calls against the position, and continued to roll up and out, as the price has sky rocketed. I am currently holding jun 18/150 covered calls and considering rolling again for a credit. What is downside risk of continuing with this approach?
Posted by jdub965
6 Comments
Trump promised to increase military budget by 50% next year and you still feel like BA has no room for growth? 🙂 just let it go
Only down side I see would be it come back down to $40 or less and you never sold at $100+
But as long as you’ve made enough premium to get your cost basis down significantly and can continue to sell covered calls on it there is no real “risk”
I do this all the time, but I let it get assigned before it gets out that far. Frees up capital to use for something that generates more cash sooner.
As others have pointed out, the risk is that the stock loses value while you’re waiting for the next expiration date to roll around. However, you can always roll down if needed, although that has its own tradeoffs.
If you really want to hold the stock, your plan is pretty good in general.
You’re way OTM at the moment (spot of $107.94), so why even consider rolling considering that you are now in the 180 day period where theta burn kicks up a notch?
I’ve been doing this on one I’ve held for a very long time and in truth I should sell it but whatever.
So long in fact that my cost basis is essentially negative. I’ve collected more premium than I paid for the stock
Hey there!
Your main risk here is mainly the oppertunity cost more than anything else.
BE has had that crazy 300% run and you’re sitting on Jun 150s while the stock is at $108 – seems safe but if BE gaps up on another big partnership announcement or earnings beat, you’ll either have to roll for a debit or just accept assignment and watch it keep climbing
The other thing thats kinda underrated is the IV compression risk. Right now BE options are juicy with IV in the 100-120% range which makes rolling easy, but if the stock consolidates and IV drops to like 60-70%, those roll credits basically disappear. Then you’re stuck choosing between paying to roll or getting assigned way below where the stock actually is.
I had a similar situation with a tech stock last year where I kept rolling up and out thinking I was smart, collecting credits each time. Then one day the stock jumped 15% on acquisition rumors and suddenly all my “profitable” rolls meant I missed out on like 40% gains. The credits I collected were pennies compared to what I left on the table.
One approach that helped me was tracking the GEX levels and IV percentile more closely to time when to just take assignment vs keep rolling. When gamma exposure flips and IV is elevated, thats usually when I’ll keep the position. But when IV starts compressing and the roll credits get small, sometimes its better to just let it go and redeploy capital…that can mean to wait for a pullback or jsut find a better deal in some other stock. In my case I just reinvested when the pullback came around (this is where tracking global news comes in handy).
tbh the hardest part is accepting that you already won big on this position (sounds like you bought BE super low but i dont know your cost basis) and any assignment at 150 is still a massive win. The psychological trap is always “just one more roll” when sometimes the smart play is taking the W and moving on.
I mean everything revolves around your cost basis, you have to do the math but I think what I wrote pretty much solves your dilemma.
Sincerely,
David