Dr. Alan Ellman | Dec 09, 2018 12:18AM ET
One of our covered call writing exit strategies when the strike is in-the-money on expiration Friday is rolling out-and-up. This is when we buy back the near-month call (buy-to-close) and sell the next month’s higher strike. There are times when share appreciation has dramatically increased above the near-month strike price such that buying back the current call option can be expensive relative to the premium originally generated. The question we ask ourselves is whether the cost-to-close is justified? On June 15, 2018 (expiration Friday), Karl wrote me about such a scenario he was considering with Five Below, Inc (NASDAQ: FIVE).
Karl’s initial trade with Five Below Inc (NASDAQ:FIVE)
Initial trade calculations using the multiple tab of the Ellman Calculator
Expiration Friday statistics
Rolling out-and-up calculations using the “What Now” tab of the Ellman Calculator
Approaching the trade when there is a bullish assessment
In my books and DVDs, I define rolling out-and-up as a bullish exit strategy where we still like the underlying security and overall market environment. That said, how would this trade look if we were never in a trade with FIVE for the June contract and were considering this stock for the July contract:
Discussion
Rolling out-and-up is a bullish covered call writing exit strategy. We employ this position management technique when the stock continues to meet our system criteria and our overall market assessment is neutral to bullish. When evaluating the cost-to-close, we must factor in the increase in share value created by the intrinsic value component of the buy-to-close option premium.
Market tone
This week’s economic news of importance:
THE WEEK AHEAD
Mon Dec. 10th
Tue Dec. 11th
Wed Dec. 12th
Thu December 13th
Fri December 14h
For the week, the S&P 500 moved down 4.60%% for a year-to-date return of -1.52%
Summary
IBD: Market in confirmed uptrend
GMI : 2/6- Bearish signal since market close of November 13th, 2018 as of Friday morning
BCI: Selling an equal number of out-of-the-money and in-the-money strikes. Will hold with this ratio until the Fed announcement.
WHAT THE BROAD MARKET INDICATORS (S&P 500 AND VIX) ARE TELLING US
The 6-month charts point to a bearish tone. In the past six months, the S&P 500 down 5% while the VIX (23.34) moved up by 93%.
Wishing you much success,
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