Portfolio Tactics: Analyzing Risk When Rolling Your Covered Calls

Rolling Out Veeva Covered Calls

Let's now review the trade for VEEVA and our rolling possibilities.

Evaluating the expected return for VEEVA in the July cycle, the following screenshot of the elite calculator shows up.

(Source: Option Generator Calculator)

Excluding the upside potential, the return on our covered-call would stands at 4.53%. Our total breakeven, as can be seen from the image above, amounts to $213.68.

Now, let's evaluate the next one-month returns for $230, $240, $250 and $260 strikes in the AUG expiration cycle.

Rolling out (and up): $230 and $240 strike

(Source: Option Generator's Calculators)

The cost-to-close is $10.13, of which 2.58% is time value. There's nothing left to make on that July option. If we roll out to $230, we collect $29.80 for the AUG cycle; rolling out and up to $240 generates $22.70 for the AUG cycle. Summing it all up, we get the following outcomes.

(Source: Option Generator's Calculators)

By rolling out, we're collecting another credit resulting in $5 breakeven-reduction to $208.68. Our next one-month return for AUG stands at 2.17% as long as VEEVA's share price does not drop below $230. Rolling out and up to $240 unlocks upside potential that has so far been locked up in the $230 option. In essence, we free up $10 per share in upside potential by rolling up. Our forward 1-month return now equals to 3.43%. That's because the option is closer to current market value, resulting in more time value (theta).

However, there's a trade-off when rolling out and up for a debit: a higher breakeven-point, namely from $213.68 to $215.78. More importantly, our shares are now worth $240, not the current market value $254.16.

Rolling out (and up): $250 and $260 strike

Let's take it a step further and evaluate the returns for both the $250 and $260 AUG calls.

As for the $250 call, our new one-month return equals to 5.07% as long as share value does not fall below $250 by August expiration.

(Source: Option Generator's Calculators)

The $260 call allows for additional capital appreciation, but comes at a cost of $13.25 when rolling from July to August. A maximum profit potential of 7.04% can be reached if VEEVA trades above $260 by August expiration.


(Source: Option Generator's Calculators)

Let's visualize the total returns for these 4 strikes. The following numbers are valid as long as the share price does not fall below the strike price. For example, Sam's VEEVA position with a new $240 AUG call will have generated $24.22 by August 21, if and when VEEVA shares are trading above this strike price. That means that we have DOWNSIDE protection of that profit (5.5% correction from current market value).

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