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