the stock price. This can bring Bill to his stop-loss sooner. Delta versus
theta however, is the major consideration. He will plan his exit price in
advance and cover when the planned exit price is reached.
There are more moving parts with the covered call than a naked option. If
Bill wants to close the position early, he can leg out, meaning close only
one leg of the trade (the call or the stock) at a time. If he legs out of the
trade, he’s likely to close the call first. The motivation for exiting a trade
early is to reduce risk. A naked call is hardly less risky than a covered call.
Another tactic Bill can use, and in this case will plan to use, is rolling the
call. When the March 70s expire, if Harley-Davidson is still in the same
range and his outlook is still the same, he will sell April calls to continue
the position. After the April options expire, he’ll plan to sell the Mays.
With this in mind, Bill may consider rolling into the Aprils before March
expiration. If it is close to expiration and Harley-Davidson is trading lower,
theta and delta will both have devalued the calls. At the point when options
are close to expiration and far enough OTM to be offered close to zero, say
0.05, the greeks and the pricing model become irrelevant. Bill must
consider in absolute terms if it is worth waiting until expiration to make
0.05. If there is a lot of time until expiration, the answer is likely to be no.
This is when Bill will be apt to roll into the Aprils. He’ll buy the March 70s
for a nickel, a dime, or maybe 0.15 and at the same time sell the Aprils at
the bid. This assumes he wants to continue to carry the position. If the roll
is entered as a single order, it is called a calendar spread or a time spread.