There’s nothing worse than seeing the trade you’d envisioned start to take a turn for the worse, falling apart right before your eyes.

While much of this can be prevented with a sound strategy and the help of our stock analysis software, selling covered calls won’t always work out how you’d planned.

With traditional stock trading, you can simply close your position out and cut your losses early. This isn’t a luxury you have when trading options – at least, not in the same way. You can still pivot slightly by rolling covered calls.

This tactic involves buying back the original call option and selling a new one with a different strike price. We’ll talk more about when to roll covered calls and 4 different ways you can go about it below.

You’ll also learn how our stock advisory paired with the OptionsPro integration can save you time and stress while empowering you to earn higher returns by stacking the odds in your favor anytime you’re writing options contracts.

What is Rolling Covered Calls?

So, what is rolling covered calls exactly? Let’s quickly take a step back and explain what a covered call is in the first place. This is an options strategy in which you write (sell) call options on one of your open positions with the goal of earning premium income.

You’d write covered calls on stocks you have a mildly bullish outlook on, with the expectation that the stock will not rise above a certain threshold. This way, your contract does not get assigned – meaning you won’t have to sell your shares at a lower price, and you can pocket the premium you earned from selling the contract.

However, the moment the stock price exceeds the strike price in options trading, your risk of assignment is real. The holder of the contract can choose to buy your shares at a lower price than market value.

This is where rolling covered calls comes into play.

This involves closing the current call option and simultaneously selling another call option on the same underlying asset, typically with a different strike price or expiration date.

The primary goal of rolling is to adjust the position in response to market movements, potentially capturing more premium, extending the position’s duration, or protecting against losses.

You can stay flexible when you know how to roll covered calls, which is why we’ll walk you through it in just a few moments. First, let’s discuss when to roll covered calls.

When to Roll Covered Calls

There are quite a few scenarios in which rolling covered calls might make sense.

Market Conditions to Watch

Even the best approach to performing stock analysts and optimizing your options strategy will be affected by unexpected market conditions sometimes.

If a surprise earnings beat catches you off-guard and the underlying stock price looks to be surging above the strike price, you might consider rolling up to a higher strike price to capture more upside potential while still collecting premiums.

On the other hand, rolling down might help you lock in some premium while staying in the trade if the stock price is falling. You should stay up to date on IV in options trading as well, as higher volatility can raise your premiums and make rolling more profitable.

Profit and Loss Considerations

Rolling covered calls is fairly simple – you can run the numbers and figure out when the potential profit from the new position outweighs the costs and risks of the current one.

Let’s say the current call option is close to being in the money and you’re facing the possibility of having your shares called away. You could roll the contract to avoid this assignment while earning more premium.

Just make sure you calculate the break-even point and compare the potential gains from rolling with the risks and costs involved, including transaction fees. As you’ll soon discover, rolling contracts does come at a cost.

Tax Implications

Understanding the taxes on covered calls is an important aspect of trading covered calls for income. Rolling covered calls brings its own tax implications into play.

Selling a call option that expires in the money or rolling to a new position may trigger taxable events depending on the timing and type of accounts you’re using.

This is to say that you need to keep in mind that short-term capital gains could apply when rolling contracts. Learn more about how options are taxed in our blog.

Personal Investment Goals

At the end of the day, your personal investment goals will dictate when to roll covered calls and when to hold ground on the existing contract you sold.

If you’re only selling covered calls to generate income, rolling might make more sense if it helps you continue to collect premiums while maintaining exposure to the underlying stock.

But if the priority is capital appreciation, you may choose to let the current option expire and reevaluate your strategy based on market conditions.

Rolling might also be a good choice if you want to defer a potential taxable event, retain ownership of a stock you believe will continue to appreciate, or adjust your position to better align with your risk tolerance.

How to Roll Covered Calls: 4 Different Ways to Go About It

The use cases for rolling covered calls are plentiful, but how do you actually go about it? We’ll walk you through how to roll covered calls in 4 different ways below while providing general insights on executing the strategy.

Rolling Up

Rolling up involves closing your current covered call position and simultaneously opening a new one with a higher strike price. Use this strategy when the underlying stock’s price has increased significantly, and you want to capture more upside potential while continuing to earn premium income.

This allows you to adjust your strategy in accordance with the stock’s new price level. You can lock in more gains if the stock continues to rise. However, the premium received from the new call option may be lower since the strike price is higher and further from current market price.

Rolling Down

On the other hand, rolling down is the process of closing your current covered call and opening a new one with a lower strike price. It’s helpful when the stock price has declined, and you want to earn more premium with a strike price closer to the market price.

Rolling down can be a defensive move to adjust to a bearish trend while still generating income. The trade-off is that by lowering the strike price, you may be limiting your potential upside if the stock price rebounds.

Rolling Out

Rolling out involves extending the expiration date of your covered call option by closing your current position and opening a new one with the same strike price but a later expiration date.

This strategy is useful if you believe the stock will continue trading near its current level and you want to collect additional premium income.

You give the underlying stock more time to move in your favor, but it also means you’re committing to the trade for a longer period, which could tie up your capital. That’s why it’s best used for positions you already intend to hold long-term.

Rolling Down and Out

As the name suggests, this method combines two different approaches – lowering the strike price of your covered call while simultaneously extending the expiration date.

This is implemented when the underlying stock’s price has declined significantly, and there’s concern that it might stay low or even drop further. It allows you to continue generating premium income despite the stock’s decline, albeit with the potential of selling the stock at a lower price.

Rolling Up and Out

You can probably piece together how this method of rolling covered calls works. You’ll close your existing contract and open a new one with a higher strike price and a later expiration date.

This strategy works when the stock price has risen and you expect the trend to continue, but you also want to give the stock more time to appreciate.

Rolling up and out allows you to capture more premium than just rolling up while also benefiting from potential future gains in the stock price. Just know this is more complex and may involve higher risk since it relies on accurate predictions of the stock’s future performance.

Don’t worry – you can give yourself an unfair advantage by pairing our investment app for beginner traders and expert investors alike with the OptionsPro integration.

It gives you a unique way to look at options contracts and choose the strike price and expiration dates that maximize premium income while reducing your risk of assignment. Get a free stock analysis and find out firsthand why it’s the best stock analysis app.

How to Execute the Strategy

As far as how to roll covered calls, the actual strategy is fairly simple. Here’s a brief overview of how it works:

  • Monitor Your Position: Keep a close eye on the performance of your stock and the covered call. Changes in stock price, implied volatility, and time decay all influence the value of your options.
  • Determine the Timing: Choose when to roll covered calls based on market conditions, your stock’s performance, and your financial goals. Timing is everything to maximize the benefits of rolling.
  • Close the Current Call Option: Execute a buy-to-close order for your existing call option to close your position. This step locks in profits or mitigates potential losses from the initial covered call.
  • Open a New Call Option: Execute a sell-to-open order for the new call option based on your chosen rolling strategy – up, down, out, or a combination. Make sure the new option aligns with your updated market outlook and investment strategy.
  • Evaluate the Outcome: After rolling the covered call, continuously monitor the new position and be prepared to adjust your strategy again if market conditions change.

You can learn options trading more in-depth in our blog with resources on what happens when options expire, what does it mean to exercise stock options, warrants vs options, trading futures vs options, why covered calls are bad, benefits of trading stock options, call vs put, long calls vs covered calls, and more.

Wrapping Up Our Guide to Rolling Covered Calls

Rolling covered calls can be a powerful strategy for maximizing income and managing risk with options. Now that you know when to roll covered calls and how to actually go about it, you can be quick on your feet and adapt to changing market conditions while continuing to earn premium.

But remember, being able to find the best stocks for covered calls 2024 or covered call ETFs is essential for stacking the odds in your favor when selling options. That’s why if you’re serious about learning how to make money with options, you need the best stock picker – VectorVest.

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