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How to Roll a Covered Call Position

On occasion, I write covered calls to help boost the income of my portfolio. What is a covered call? At a high level, it’s allowing another investor (call buyer) the opportunity to purchase your shares (minimum 100 shares) at a certain price (strike price) and by a certain date (expiry).

Why would a covered call seller even consider the “option” for someone else to purchase their shares? Because they are paid to do so (called a premium)! For the buy and hold investor, writing a covered call is purely for the premium. The goal is for the option to expire without the shares being called away (ie. expire below the strike price) so that you can turn around and write another covered call. It can be a perpetual way to boost the returns from a stock holding providing that the stock does not get called away. As you play around with covered calls, you’ll notice that the higher the volatility of the stock, the higher the premiums will be as there is a higher likelihood of the stock price reaching the strike price.

As a dividend investor, I write covered calls on occasion to boost my monthly payout.  I typically write them with about a one month expiry, but sometimes I get a bit greedy and accept a lower strike price in exchange for a higher premium.  This means that the strike price has a higher probability to be hit, thus the stock being called/traded away.

When the stock price does go higher than the strike price, you have a few choices:

  1. Do Nothing. Wait for the expiry, and if the strike price is still higher, then the stock will most likely get called away (you’ll get charged a sell commission too).
  2. “Buy to close” the covered call position.  If you do this, you will pay more to buy back the call option than the premium that you received.  However, closing the call position allows you to continue riding the upside.
  3. Roll the Call.  Here you buy back the call AND sell a new call higher than the current stock trading price.  More details on this below.

Rolling the Covered Call

In the situation where the stock price is approaching or has exceeded the strike price, rolling the covered call may make sense.  As mentioned, rolling a covered call is where you:

  1. Buy back (buy to close) your covered call position;
  2. Turn around and sell a new covered call at a higher strike price and collect a new premium.

In this scenario, the cost to buy back the call will be higher than the premium received.  The difference is calculated as a capital loss.  This hurts a little, but rolling the call helps ease the pain. One strategy is to pick an expiry that’s far enough out so that the new premium offsets the cost to close the call.  Personally, I simply roll out the expiry another month at a higher strike price at a low probability of being hit.

A Real Life Example

I’m going to share with you an example of where writing a covered call may not have been the greatest of ideas, but rolling the call forward helped.  In my U.S trading account, I hold a company called (CTRP) which is like the Expedia of China purchased at $22.35.

The stock gapped up aggressively one May morning and I thought it was overdone, so I effectively shorted it by writing a June 22, 2013 expiry covered call at @$30 (trading at around $27 at the time) collecting $80USD in the process.  Unfortunately, I was wrong, and the stock continued up to the $30 mark the same day!  My instinct was that the stock was going to continue higher, so a couple weeks later I rolled the call forward.  This is how I did it:

  1. I bought back the covered call for $230 USD (net loss $150 before commission)
  2. Sold a new covered call with same expiry date @ a strike price of $34 collecting a premium of $40 USD.  This reduced the loss to $110 USD before commissions.  However, if the stock gets called away @ $34, there is an additional $400 in capital gain.

Fortunately, the stock closed well below the strike price by the expiry date and the stock price has continued to drift upwards.  I have since sold an August 41 call (August 17th expiry at a strike price of $41) for $65, so we’ll see how that goes!  I’m making mistakes but slowly learning from them.

What is your experience with covered calls?

For more background information:

Disclaimer:  This article is for informational purposes only.  Options are extremely risky and should only be considered by highly experienced investors.

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  1. Park on July 22, 2013 at 10:46 am

    Covered calls will increase the income from your portfolio, but will it increase your return? If one needs income from your portfolio, why not sell some shares? The costs will probably be lower (commissions, bid ask spreads). Taxes will most likely be lower. And by selling some shares, you know the income that you’ll be getting, unlike covered calls.

    People use options to increase income from their portfolio. Is there any research that shows that this is a better way than just selling some shares, i.e. creating your own dividends? Is the use of options to generate income just another manifestation of investor reluctance to use principal for income?

  2. Park on July 22, 2013 at 11:07 am

    If one thinks that a stock’s price is gong to move sideways, then a covered call will increase your return. If you think the price is going up, you should sell the stock and buy calls. If you think the price is going down, you will make money with covered calls, but you’d be better off selling the stock and buying puts.

    There are those who have some success predicting the price of stocks. But the number who can predict the price of stocks within the next few months is a smaller subset of that. And the average retail investor, IMO, is unlikely to be in the latter group.

  3. Paul on July 22, 2013 at 12:50 pm

    I have sat and passed the exams to be licensed in Options (a covered call is a type of option), Futures and Derivatives…

    I’m also uncomfortable reading articles like this.

    I’d caution anyone NOT to trade covered calls or any option unless:

    (a) they’re a very experienced investor

    (b) they have a high risk tolerance

    (c) they fully understand the instrument they are trading (options are a very different beast from stocks)

    (d) they understand the potential tax implications of trading options – both for the option itself (and/or premium) and any associated underlying stock (when they are writing options)

    I have seen many an inexperienced investor get badly burned trading options.

  4. Paul on July 22, 2013 at 12:52 pm


    I’m also uncomfortable reading articles like this.

    Should have read:

    I’m always uncomfortable reading articles like this.

  5. The Passive Income Earner on July 22, 2013 at 7:37 pm

    I have no experience with covered calls but it’s on my list to try and see if I can REGULARLY generate extra income from my positions.

    Do you pick any stocks or do you have a strategy around the stock you pick? My thought was to start with the banks.

    Any accounts you don’t recommend doing it from? I guess it follows the same tax principle as stock capital gain/loss

  6. Tony on July 23, 2013 at 4:04 am

    @Paul: agreed with your comment on cautions around trading options.

    I am a novice investor of around 2 years of stock experience. My first play with options was about a year ago. I used to constantly sell naked puts (VERY risky) and covered calls (less risky vs. other options).
    For about 8 months straight, I had never had a naked put expire in the money, but then I made one loss (on AAPL puts) and that wiped 6 months of gain away. This could be a textbook example for anyone who is looking into this area and i don’t mind being the counterexample :P

    From a learning experience stand point, i would suggest reading through all basic types of options trading prior to any real transactions. You may get burned, so always remember verifying potential maximum loss is affordable. I could not figure out a better way to learn anything other than do it for real, and option trading is no exception.

    However, just like Paul mentioned, this is very different from ordinary stock trading and it is absolutely not for everyone.

    Regarding tax implications, as far as i know, option income in registered accounts are tax free; in non-registered account, it is treated the same as capital gains / losses. One interesting thing is the *settlement date* (not expiry date or whatsoever) of such transactions are used in tax reporting. Settlement date for most option trading is T+1, rather than the ordinary T+3 for stocks.

  7. FrugalTrader on July 23, 2013 at 9:23 am

    @Park, tough to know. For me, I would rather not depend on selling shares for income as the market is volatile. I would rather depend on a steady dividend stream for income – covered calls are considered a bonus.

    @Paul, thanks for that, I agree completely.

    @Passive, registered accounts are best IMO b/c each trade will trigger a taxable event otherwise. Covered calls only work with positions of 100 shares or greater and premiums are greater if the volatility of the stock is high.

    @Tony, thanks for sharing your experience.

  8. BC on August 3, 2013 at 1:10 am

    By writing calls, you are limiting your gains to the premium plus any difference between the strike and share price and you are exposing yourself to much greater losses if the position goes against you (example Tony. You are doing exactly the opposite of what you should be doing – limiting losses and maximizing gains. I used to write covered calls for COH in 2009 when the market was coming up off the bottom. My gains were limited on the upside and I only made about $8K instead of about $40K if I didn’t write covered calls.

  9. Nightrider on August 28, 2018 at 9:51 pm

    I have been in stock trading (not a professional) – for a long time. In my early days I dabbled in options, naked puts/calls, covered calls etc…. I did not make a boat load but just enough for my beer over the weekend….!!!! That won’t cut it for me.

    My two cents worth to all those young or inexperienced : Stay away from any kind of speculation. Play only with what you can afford to lose. You think you can make a lot of money? Been there, done that. It did not work for me. May be I am the dummy.
    Now that I have a couple of nickels to rub with each other, those young investors who seek my advise I tell them:
    Do the tried and true method: Be long, no timing, go DRIP and be slow and steady with disciplined regular saving and……. Have patience – choose boring value stocks. That is the mantra for a sure winner. And I SWAN (sleep well at night). Nothing fancy or dancy about that.

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