Chapter 2: Covered Call Writing 83 
write early. Of course, if the trade was done in a margin account, the writer will be 
reducing the margin interest that he had planned to pay in the position, because the 
debit will be erased earlier. In most cases, the increased commissions are very small 
and the lost dividend is not significant compared to the increase in annualized return 
that one can achieve by closing the position early. However, this is not always true, 
and one should be aware of exactly what his costs are for closing the position early. 
Obviously, getting out of a covered writing position can be as difficult as estab­
lishing it. Therefore, one should place the order to close the position with his bro­
kerage firm's option desk, to be executed as a "net" order. The same traders who facil­
itate establishing covered writing positions at net prices will also facilitate getting out 
of the positions. One would normally place the order by saying that he wanted to sell 
his stock and buy the option "at parity" or, in the example, at "25 net." Just as it is 
often necessary to be in contact with both the option and stock exchanges to estab­
lish a position, so is it necessary to maintain the same contacts to renwve a position 
at parity. 
ACTION TO TAKE AT OR NEAR EXPIRATION 
As expiration nears and the time value premium disappears from a written call, the 
covered writer may often want to roll forward, that is, buy back the currently written 
call and sell a longer-term call with the same striking price. For an in-the-money call, 
the optimum time to roll forward is generally when the time value premium has com­
pletely disappeared from the call. For an out-of-the-money call, the correct time to 
move into the more distant option series is when the return offered by the near-term 
option is less than the return offered by the longer-term call. 
The in-the-money case is quite simple to analyze. As long as there is time pre­
mium left in the call, there is little risk of assignment, and therefore the writer is 
earning time premium by remaining with the original call. However, when the option 
begins to trade at parity or a discount, there arises a significant probability of exer­
cise by arbitrageurs. It is at this time that the writer should roll the in-the-money call 
forward. For example, if XYZ were offered at 51 and the July 50 call were bid at 1, 
the writer should be rolling forward into the October 50 or January 50 call. 
The out-of-the-money case is a little more difficult to handle, but a relatively 
straightforward analysis can be applied to facilitate the writer's decision. One can 
compute the return per day remaining in the written call and compare it to the net 
return per day from the longer-term call. If the longer-term call has a higher return, 
one should roll forward.