How to Repair a Losing Long Call Position

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Rolling forward — replacing a current short option with another expiring later — is an attractive policy. It produces additional income while enabling the option writer to avoid or defer exercise. If the roll also replaces a current strike with a higher one for a short call or a lower one for a put the strategy also increases potential capital gains in the event of future exercise. However, rolling also can work as a trap in two ways. First, if a loss is created in the original position and not recaptured by the subsequent option position, then writing short options will not be profitable.

Second, the forward roll in a covered call strategy can result in an unintended exercise and resulting short-term capital gain instead of an expected and lower-rate long-term capital gain. A forward roll is the closing of a short option by way of a closing purchase order rolling long call options a later-expiring replacement option on the same underlying stock.

A forward and up roll refers to replacing a short call with a later-expiring option with a higher strike. A forward and down roll refers to replacing a short put with a later-expiring option with a lower strike. Tax consequences can apply in the process of rolling a covered call.

A qualified covered call is one that resides within one increment of strike below the current value of the underlying stock, with varying levels based rolling long call options qualification depending on the strike level and the time to expiration. An unqualified covered call is one deep in the money and beyond the specified qualification levels.

Writing an unqualified covered call tolls the period counting toward long-term capital gains treatment of profits when stock is sold or called away. Rolling forward to avoid exercise is a rolling long call options that should be considered, remembering that doing so extends the time a short position remains open.

This also extends risk exposure, so the strategy has to include a comparison of potential savings with the exposure of risk. Option writers can unintentionally find themselves doing all they can to avoid exercise, even accepting a loss; this is a mistake.

Exercise is one of several possible outcomes, and it only makes sense to short options if that outcome is acceptable within individual risk tolerance. Before entering into any forward rolling strategies, especially for covered call positions, traders should understand the rules for qualified covered calls; they will want to avoid losing or tolling the count to long-term capital gains status to avoid offsetting option-based profits with higher tax liabilities.

The strategic value of the forward roll Rolling forward involves a buy-to-close trade on a current short option, replaced with the sale of a later-expiring option on the same underlying stock. The strategy can be used for either calls or puts.

The intention is to avoid or delay exercise when the option has gone in the money or threatens to before expiration. In theory, a writer can roll forward indefinitely, avoiding exercise until the short option remains out of the money at expiration.

This strategy is especially attractive for covered call writing, because the market risk in the short position is minimal compared to uncovered call or put writes. Secondly, the forward roll at the same strike produces additional income because a later-expiring option is always more valuable than an earlier-expiring option. This is due to the nature of time value, which is higher for longer expiration terms. For call writes, a variation on the strategy is to replace the current short position with a later-expiring, higher-strike call.

This may involves a smaller credit or even a debit. Call writers assess the value of the higher strike roll by comparing the net cost to the additional strike value. If the subsequent covered call is not exercised but ends up rolling long call options replaced, the loss could become permanent. For example, if the writer decides to c lose out the This is an example of how covered call writers can deceive rolling long call options through excessive use of the forward roll, and create net losses without intending to.

The forward roll is a valuable strategy, but there are times when it makes more sense to roll to rolling long call options same strike and gain a small profit, or simply accept exercise on the position. The pitfalls of the forward roll The potential for creating an unintended loss is only one of the dangers in utilizing the forward roll. Part of the assessment of any strategy should balance benefit against risk rolling long call options and risk includes continued exposure in a short position.

Does the potential exercise avoidance justify the added time the short option rolling long call options open? The risk is not limited to potential exercise of a short option.

Rolling forward keeps you committed in the position, meaning more capital tied up to maintain margin requirements, also translating to the potential loss of other opportunities between now and expiration of the short option. Any option writer needs to continually keep the overall net rolling long call options or loss in mind, and to analyze the current position in terms of the time element as well.

So in considering a forward roll, do you want to move the open period out later than two months? This is always possible to avoid exercise, and the further out you go, the more you are rolling long call options to roll up and still create a rolling long call options. However, that always means the covered position has to remain open much longer; and this is where your judgment has rolling long call options come into play.

It should always be worth the extension of risk and exercise avoidance, or rolling rolling long call options does not make sense.

Many covered call writers end up forgetting rolling long call options exercise should be an acceptable outcome. In fact, when properly structured, exercise is a highly profitable outcome, given that profits come from three sources option premium, capital gains and dividends. At times, it makes the most sense to let exercise happen and then turn over the proceeds in another position.

Rolling the short put Forward rolling also works for short puts. In this situation, you avoid exercise by replacing a current short strike with rolling long call options expiring later. To increase potential profits or reduce potential losses in the event of exercise, you can roll forward and down to a lower strike. The same caveat applies to short puts as that for short calls: Make sure you evaluate the time commitment risk along with the net credit or debit of the forward roll.

Whenever you short a put, one possible outcome is exercise, meaning shares will be put to you at the fixed strike. This makes sense only when you consider the net cost of buying those shares is a price you think is fair. However, you still want to avoid the forward and down roll if the cost is going to represent added expense and an unacceptably longer time the short position has to stay open.

Unqualified covered calls A final risk involved with rolling covered calls forward involves the complexity of federal tax law. If closing the position includes exercise, then the capital gain will be short-term, even if the overall holding period is longer than one year.

For example, if you bought stock nine months ago, you have only three months to go rolling long call options any gains will be long-term. At this point, you have a point gain on the stock, and you decide to write a deep in-the-money covered call. But there is a problem.

Exercise will create a short-term gain in the stock because the covered call was unqualified. For example, you might decide to write a five-month call believing that exercise at any time after another three months creates an automatic long-term gain on the stock. But if the call is unqualified, this is not the case.

The profit will be taxed as a short-term gain. This problem could turn up in an invisible way, involving the forward roll. To delay exercise, you buy to close rolling long call options original In this example, you replacing an qualified covered call with an unqualified one, meaning the count for long-term treatment stops as soon as the roll takes place.

The rule for identifying qualified cove red calls rolling long call options complex, and is summarized in the chart: The rolling long call options to remember is this: Keep the forward roll in your arsenal of strategies to manage short option positions, but always be aware of the risks: Tying up capital longer than you want, creating net losses, and losing long-term capital gains status.

Make all trading and investing decisions only after you have made sure that you appreciate and know about all market, margin, and tax risks involved.

Thomsett is author of over 70 books in the areas of real estate, stock market investment, and business management. He lives in Nashville, Tennessee and writes full-time. At Connors Research, we are using it as an overlay to many of our best strategies to make them even better -- now you can, too. The Connors Group, Inc.

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Rolling is a fairly common technique in options trading, and it has a variety of uses. In very simple terms, it's used by options traders to close an existing options position and then open up a similar position using options contracts based on the same underlying security but with different terms.

Typically, this technique is used to either effectively adjust the relevant strike price of a position or to extend how long you want to hold a position for. It can be used with long and short positions, and it's a technique that most options traders will want to consider at some point. There are actually three different forms: On this page we will explain each of them in detail.

Rolling up is when you close an existing options position and simultaneously open up a similar position, but using options with a higher strike price. You are effectively rolling the option up to a higher strike price, hence the term. You can do this with a long or a short position, and the process is really quite simply. You would use the sell to close order to close your position if you were long on options, or you would use the buy to close order if you were short on them.

At the same time, you open a new position, using either the buy to open order for the long position or the sell to open order for the short position, on contracts on the same underlying security but with a higher strike price. The process is exactly the same whether it involves calls or puts, but the effect is different. When rolling up calls you will be swapping your existing position for one involving cheaper contracts.

The higher the strike price of calls the cheaper they are. If you are rolling up puts, then you will be swapping your existing position for one involving more expensive contracts, because the higher the strike price of puts, the more expensive they are.

Of course, the effect also depends on whether you are long or short. Rolling up a long call position means a net cash gain, because you will be selling one position and entering a cheaper one.

However, if you are rolling up a short call position, then you will have to pay more for the contracts you are buying back than you will receive for writing the new contracts at the higher strike price. On other hand, rolling up a long put position means selling the cheaper contracts that make up your existing position and buying more expensive ones. Whereas rolling up a short put position means closing your position by buying back the cheaper contracts and then writing more expensive ones.

It's not very often that you would roll up when long on puts though. The technique of rolling up is used for a number of different reasons. It depends on what your existing position is and what the circumstances are.

For example, you would typically use the technique when short on calls to prevent assignment of the contracts you have been written. To prevent the calls you had written from being assigned, forcing you to sell your stock, you could roll up the contracts to a higher strike price that was out of the money.

If you were long on calls, you might choose to roll up to a higher strike price if the underlying security had risen significantly and your calls had become deep in the money. By doing this you can take the profit from the existing position, but continue to speculate on further rises without risking all the profit you had made so far.

If you were long on puts expecting a security to fall in value, but that security actually went up in value, you might use this method to cut your losses but still speculate on the security falling back down in value. By selling your out of the money puts, you could recover any extrinsic value left in them and then effectively reinvest in puts with a higher strike price — meaning your position would be nearer the money and you would stand to gain more if the price of the security did fall from that point.

It's worth noting that there is risk involved with this technique, particularly in a volatile market or one that is moving quickly in one direction. If the price of options contracts is fluctuating significantly, then the change in prices between closing one position and entering another could have a major impact. If there is a time delay between two related orders being filled, and that during that time delay prices change, this is known as slippage.

Slippage is a problem that options traders can face whenever they are placing multiple orders that are related to one overall position.

Most of the best online brokers offer a solution to this particular problem; they provide a specific roll up order, which basically is one order that simultaneously closes the existing position and opens up the new one with the higher strike price.

Most options trading strategies involve the use of spreads consisting of multiple positions, so you may experience a time when you need to roll up more than position at a time. If you want to roll up an entire options spread, then this can involve several transactions and can be somewhat complex.

Because of this, the roll up of options spreads isn't really something that beginner options traders should be considering.

This technique is very much like to the rolling up technique, but effectively the opposite. Instead of moving one position to a similar one with a higher strike price, it involves moving to one with a lower strike price. You still need to exit the existing position, and then you must enter the corresponding position using contracts that have a lower strike price. Again, it can be applied to both short and long positions, and to both calls and puts. The top online brokers will also typically offer a roll down order, which effectively combines the two required orders into one.

There are three main reasons for using this technique, which would depend on what position you currently have and what the circumstances are. These three reasons are as follows:. To prevent assignment on a short put position. It can be used to avoid assignment if you have written puts that have moved into the money and you want to avoid the obligation of having to buy them.

To take profit on puts and speculate from further downward movement. If you owned puts that had moved deep in the money, you could roll down to take the profit from those options and purchase puts with a lower strike price. This would allow you to benefit from a further fall in the underlying security without risking the profit you have already made. To cut losses on calls and speculate on the underlying security recovering.

If you owned calls that were significantly out of the money due to the price of the underlying security falling, but felt that the underlying security may rally and their price may increase again, then rolling down is useful.

You can cut your losses on your out of the money calls, and then buy calls with a lower strike price that have a better chance of returning a profit if the underlying security does start to increase in price. When options you own or have written are reaching their expiration point there are a number of things you can choose to do depending on the circumstances.

If you own options that are in the money, then you may want to exercise them if you have that choice. Alternatively, you may wish to let them run until expiration and realize any profit at that point, or you can sell them to gain the intrinsic value and any remaining extrinsic value. If you own options that are out of the money or at the money, then you could sell them to recover any remaining extrinsic value, or let them run until expiry and see if they gained any intrinsic value by that point.

If you have short position on options that are in the money, then you could choose to close it to prevent any losses if they get any further in the money. Alternatively, you could choose to let the contracts run until expiry to benefit from any remaining extrinsic value and hope they get nearer the money or fall out of the money. You have another choice for your open positions where the options involved are nearing the expiration date, and that is to roll forward.

This technique is used for moving a position to a different expiry date to extend the length of time it has to run. You basically close an existing position and open a corresponding one based on the same options, just with a later expiration date. It's also known as rolling over. As with the two previously mentioned techniques, rolling forward can be done by simultaneously exiting the existing position and entering the new one using a specific order.

If your broker offers it, then it may be advantageous to execute the transactions separately. You could either enter the new position first and then close the existing one, or exit the existing position first and enter the new one after. There are two primary reasons for using this technique.

The most common is if you entered a position expecting to profit from a short term price movement, but now you expect that price movement to be over a longer period of time than expected. For example, you might have bought calls on an underlying security that you were forecasting to increase in price for a specific period of time.

If you then believed that it would continue to increase in price for a longer time, you would extend the length of your position to a later expiration date, enabling you to continue to profit. The second reason is if you entered a position expecting the underlying security to move in a certain direction within a certain time frame, and then realized that it was going to take longer than expected for the underlying security to move as anticipated.

You would extend the length of time available to try and profit from the expected move. The basic concept of all three rolling techniques is relatively straightforward; the difficulty comes with knowing when to use them at the right times.

They are definitely techniques you should be familiar with, because there will almost certainly be occasions when using them is a good idea. It's important to be flexible when trading options, and if you ever feel that you need to adjust a position slightly, rolling could be the best way to do that.

Rolling in Options Trading Rolling is a fairly common technique in options trading, and it has a variety of uses. Section Contents Quick Links. Rolling Up Rolling up is when you close an existing options position and simultaneously open up a similar position, but using options with a higher strike price.

Rolling Down This technique is very much like to the rolling up technique, but effectively the opposite. These three reasons are as follows: Rolling Forward When options you own or have written are reaching their expiration point there are a number of things you can choose to do depending on the circumstances. Read Review Visit Broker.