Most traders and investors get their initiation to options via the Covered Call. This is a strategy where you are already long the stock and sell Calls at a strike above the current price to enhance your return. You pick the strike which you think will be close the the price of the stock at Expiry, but still above it. In this way the Calls expire worthless and you get to keep the premium. In many instances though the price of the stock runs up through the Call Strike. In this case you have choices: Get called away (selling the stock at the Call Strike at Expiry), buy back the Calls or roll the Covered Calls up and out. Rolling up and out is just buying back the Calls and then selling a more distant Expiry and higher strike Call. This works well in an up market or with a strong stock like Alcoa, $AA. The chart below shows how it played out for Alcoa the first half of the year.
But what happens when you have been doing this for months and then the market starts to pullback like it is now? You can just let the options expire worthless as before. No harm in that. But a savvy trader can exploit the downside as well by reversing the roll up and out process to a roll down and sometimes in process.
Norfolk Southern provides a good example. The long term chart has a strong uptrend going back to October 2013 (red line). The stock had moved strongly higher though June and July to the peak at 108. If you had sold August 108 Covered Calls at the July Expiry, you were likely nervous as it passed through. But then the market pullback comes. Those August 108 Calls are now ‘offered 5 cents - no bid’ with over a week to go. You will collect that premium, but what if you had also rolled the Strikes down along the way? At point one from 108 to 107 and then point 2 from 107 to 104, and finally point 3 from 104 to 102? We can look at point 3 today.
If you were still short the August 104 Covered Calls Wednesday morning, you could pick up between 20 and 50 cents to roll them down to the 102 Calls. This does cap you long position $2 lower, but the chart suggests that the price may continue lower to the trend line. Assuming you can get the mid price or 35 cents, and that you did that 2 times already, you have picked up 1% over the last 2 weeks while maintaining your long term upward bias.
Recommended for You
BOSTON (AP) — Ben Affleck requested that the PBS documentary series "Finding Your Roots" not reveal he had a slave-owning ancestor, according to emails published online by whistleblower site WikiLeaks, and the information never appeared on the program.Associated Press
Some oil stocks have sold off well below oil prices.USA TODAY
Before you get too excited and start booking flights to Las Vegas for the $400 million May 2 fight between Floyd Mayweather Jr. and Manny Pacquiao, let us be clear: These $10 tickets are not for the actual fight, but for the weigh-in. Under Nevada State law, weigh-ins have always been free for the…The Fiscal Times
247 Wall St. could not help but notice four analyst calls this past week in which upside of 50% to 100% was predicted for four biotech and specialty pharma stocks.24/7 Wall St.
If you want to know the single most reliable sign a stock is bottoming, Mad Money host Jim Cramer says you simply need to wait for the moment when the estimates are so low they can finally be beaten.CNBC Videos
Residents of the Sunflower State who receive public assistance through the Temporary Aid to Needy Families (TANF) program have just gotten a stern message: Use your welfare check for frivolous reasons and you’ll lose the privilege. To ensure that federal and state dollars are being used…The Fiscal Times
Physicians are finally speaking out against Dr. Mehmet Oz and the "quack treatments and cures" he promotes to the huge audience of his television show.Los Angeles Times
Angels outfielder Josh Hamilton has put his mansion-estate in Newport Coast on the market for $16.5 million.Los Angeles Times
As Iraqi Prime Minister Haider al-Abadi was meeting President Obama and his cabinet in Washington, D.C. this week to ask for more U.S. military aid, ISIS was regaining its momentum and recapturing territory in Iraq. The group took control of Iraq's largest oil refinery for a day and is threatening…The Fiscal Times
Tidal's new owner Jay Z has been calling customers personally to thank them for subscribing, while CEO Andy Chen has left the company.CNET
Being disorganized can cost you money, and if you trim your stuff, you may slim down, too.USA TODAY
WASHINGTON (AP) — United Airlines stopped a prominent security researcher from boarding a California-bound flight late Saturday, following a social media post by the researcher days earlier suggesting the airline's onboard systems could be hacked.Associated Press24 mins ago
BEIJING (AP) — China's Central Bank said Sunday that it will cut its bank reserve requirement ratio by 1 percentage point to stimulate more lending into a slowing economy.Associated Press
Want to buy your first home with little or nothing down and maybe get a refund on part of your realty agent's commission?Los Angeles Times
For many people, working at Google is a dream...Business Insider
Scott Mather, Pimco CIO, discusses the root of today's price action.CNBC Videos
Dear Liz: What can I do to stop my broker from deducting trading fees from my Roth IRA contributions, which I make monthly? Let's say I invest $420 each month, but the broker takes $7, or $84 a year. Shouldn't ...Los Angeles Times
Issues of margin trading, a surge of individual investors into local shares, a ballooning stock market, and a slowing of the world’s second largest economy sent the largest China ETF by assets plunging ...24/7 Wall St.