However, you received a premium of $2.30 for the 95-strike call, so you netted $1.50 ($2.30 back-month premium - $0.80 front-month loss) or $150 total. Here’s the math: You lost a total of $0.80 after buying back the 90-strike front-month call. If the back-month 95-strike short call expires worthless in 60 days, you wind up with a $1.50 net credit. You’ll just have to keep your fingers crossed. So that’s good.īut you have to consider the fact that there are still 60 days before the new options expire, and you don’t really know what will happen with the stock during that time. On the other hand, you’ve more than covered the cost of buying it back by selling the back-month 95-strike call for more premium. The bad news is, you had to buy back the front-month call for 80 cents more than you received when selling it ($2.10 paid to close - $1.30 received to open). The obligation to sell was at $90, but now it’s at $95. Since you’ve raised the strike price to $95, you have more profit potential on the stock. As you’ll see, it’s a double-edged sword.
Let’s look at all the good news and bad news surrounding this trade. Since you’re paying $2.10 to buy back the front-month call and receiving $2.30 for the back-month call, this trade can be accomplished for a net credit of $0.20 ($2.30 sale price - $2.10 purchase price) or $20 total. Due to higher time value, the back-month 95-strike call will be trading for $2.30. In the same trade, you sell to open an OTM 95-strike call (rolling up) that’s 60 days from expiration (rolling out). Using Ally Invest’s spread order screen, you enter a buy-to-close order for the front-month 90-strike call. Here’s an example of how that might work. The idea is to balance the decrease in premium for selling a higher OTM strike price versus the greater premium you’ll receive for selling an option that is further from expiration (and thus has more “time value”). That means you want to go “up” in strike price and “out” in time. To help offset the cost of buying back the call, you’re going to “roll up and out.” However, the 90-strike call is now trading for $2.10, so it will hurt a bit to buy it back. The only way to avoid assignment for sure is to buy back the 90-strike call before it is assigned, and cancel your obligation. In all probability you will be assigned and have to sell the stock at $90. Now, with expiration fast approaching, the stock has gone up to $92. When you sold the call, the stock price was $87.50, and you received a premium of $1.30, or $130 total, since one contract equals 100 shares. That means you own 100 shares of XYZ stock, and you’ve sold one 90-strike call a month from expiration. Imagine you’re running a 30-day covered call on stock XYZ with a strike price of $90.
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