I’ve been selling covered calls to generate income in my account for a while. Most of the times they expire not ITM and I resell the shares. The odd time they’ve expired ITM, I take the capped profit, and I don’t worry about it. But I’m currently stuck in a situation that this call being exercised will wipe out a huge amount of growth in my portfolio.
I’m considering rolling the call but I have no experience doing so. Do I have any other options to mitigate the situation? I’d seriously appreciate any advice on what you would do in my situation.
Scenario:
I have 8 covered calls for XLK written at 230. They are set to expire on September 19. As of the time of posting, XLK is at $270.98. The calls were sold for an average cost basis of $2.67, total cost basis of $2138.51.
Rolling covered calls? Advice needed.
byu/jordynstrips inoptions
Posted by jordynstrips
2 Comments
Not sure what brokerage you use but the process might be different in all of them.
At Schwab its pretty easy, from your main screen you just select “roll option” from a pull down at the option itself.
Then you just select what you want to roll it to, you can adjust the strike and new expiration date. Each choice shows you the cost or credit.
I would never roll for a loss, but in your case you have lots of potential gain so adjust strike to the price you might not mind being liquidated at and play with the expiration date to get it as close to even trade as possible.
This is the classic covered call trap: it feels like income until the underlying rips, and suddenly you are short a ton of upside.
Rolling here is basically paying rent to stay in the house you already own. You are buying back a deeply ITM call (expensive) and re-selling further out and often cheaper than you wish. Therefore you end up lock in the loss on the short call and hope the new one earns it back. You are basically short the stock, while owning it or trying to get out of the contract you knowingly sign with the market.
Fine. That can work, but in your case XLK is $40 above strike, you are not rolling, you are digging.
Your choices are really just three:
1/ Take assignment: you sell at 230, pocket your premium, and move on. Painful, but clean.
2/ Buy back the call: expensive, but it frees your shares. You then decide if you still want XLK exposure at $270. Who knows, it may get to 300+ by the end of the year and all of that will just be a bad dream, or an expensive lesson.
3/ Do nothing: accept you capped your gains lose your shares, and take the lesson.
Rolling here is not fixing anything, it is just kicking the can at a worse price. Covered calls are best written when vol is fat and you are okay losing the shares. If you are not okay, then you should not be writing them.
For what it is worth, XLK has been on a strong run, implied vol is not extreme, and the VRP has thinned. This was never the time to be selling calls hand over fist at the first place, particularly in short expiries.
Good luck.