Rolling Out-And-Up: Explaining The “Bought-Up” Value Of Our Stocks
Dr. Alan Ellman | May 27, 2018 12:57AM ET
One of our covered call writing exit strategies is rolling out-and-up. This involves buying back (buy-to-close) the current in-the-money option and selling the later-date higher Ellman Calculator .
Hypothetical example with made-up stock “More Money Corp. (MMC)”
Current contract month
- Buy MMC for $28.00
- Sell the $30.00 call for $1.00
- Near expiration, MMC is trading at $32.00
- The cost-to-close the $30.00 call is $2.10 ($2.00 is intrinsic value and $0.10 is time value)
- The next-month $35.00 call generates $1.50
The “What Now” tab of the Ellman Calculator
The blue cells of the calculator spreadsheet (left side) are filled in:
Once the information is entered, the white cells on the right side become populated:
What is “bought-up value”?
The bottom (smaller) red arrow shows a bought-up value of $200.00 per contract or $2.00 per share. When we sold the $30.00 call our shares can be worth no more than $30.00 due to our contract obligation. However, when we buy back the option and no longer have that obligation in place, our shares are now worth market value or $32.00. This $2.00 difference or $200.00 per contract represents the “bought–up value”
Why include bought-up value in our calculations?
Since we are including the intrinsic value debit of $2.00 as part of our calculations in the $2.10 cost-to-close, we must also include this intrinsic value component on the asset side. This makes the actual time value cost-to-close $0.10.
Calculation results for rolling out-and-up with MMC
The calculator shows an option debit of $0.60 ($1.50 – $2.10) or $60.00 per contract. Factoring in the “bought-up value of $2.00 or $200.00 per contract, we have a net credit of $140.00 per contract. On a cost-basis (current market value with the contract obligation in place) of $30.00 or $3000.00 per contract, this represents a 4.67% initial return. Should share price rise to the new $35.00 strike by contract expiration, the total rolling out-and-up trade could generate a 1-month return of 14.67%
Get The News You Want
Discussion
When using the rolling-out-and-up exit strategy for covered call writing, we must factor in the increase is share price when removing the initial obligation. The new “bought-up value” will be current market value or the new strike price, whichever is lower.
Market tone
This week’s economic news of importance:
- Chicago national activity index April 0.34 (0.32 last)
- Markit manufacturing PMI May 56.6 (56.5 last)
- Markit services May 55.7 (54.6 last)
- New home sales April 662,000 (682,000 expected)
- Weekly jobless claims 5/19 234,000 (219,000 expected)
- Existing home sales April 5.46 million (5.5 million expected)
- Durable goods orders April (-)1.7% (-1.0% expected)
- Consumer sentiment index May 98.0 (98.9 expected)
THE WEEK AHEAD
Mon May 28st
- None scheduled
Tue May 29th
- Case-Shiller home price index March
- Consumer confidence index May
Wed May 30th
- ADP employment May
- GDP Q1
- Beige book
Thu May 31st
- Weekly jobless claims through 5/26
- Personal income April
- Consumer spending April
- Core inflation April
- Chicago PMI May
- Pending home sales April
Fri June 1st
- Nonfarm payrolls May
- Unemployment rate May
- Average hourly earnings May
- Markit manufacturing PMI May
- ISM manufacturing index May
- Consumer spending April
For the week, the S&P 500 moved up by o.31% for a year-to-date return of 1.78%
Summary
IBD: Confirmed uptrend
GMI : 6/6- Buy signal since market close of April 18, 2018
BCI: Selling an equal number of in-the-money and out-of-the-money for new positions.
WHAT THE BROAD MARKET INDICATORS (S&P 500 AND VIX) ARE TELLING US
The 6-month charts point to a neutral to slightly bullish tone. In the past six months, the S&P 500 was up 2% while the VIX (13.22) moved up by 36%.
Wishing you much success,
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