[6 April 22 Trades] Rolling Options Contracts To Profit Even When Market Is Down

US stocks fell for the second straight day after the Federal Reserve’s minutes revealed that officials are ready for a higher interest rate hike and a greater balance sheet reduction to aggressively fight inflation.

I have initiated (sell) covered call positions in Tesla and Nvidia in March 2022, with SP USD1,200 and USD280 respectively. As their premium value has dropped from the amount that I received when I initiated those contracts, I closed the call option contracts (buy them back) and locked in the profits (which is the difference between the premium I received and the premium that I paid).

For Tesla, I received USD2k on 24 March 22 when I open the contract and paid USD1.6k on 6 April 22 to close the contract. Thus, my profit is USD400

For Nvidia, I received USD708 on 18 March 22 (open) and paid USD141 on 6 April 22 (close) and the profit is USD567.

I then opened a new contract for Tesla at the same strike price of USD1,200 but expiring at a later date of 13 May 22, which 2 weeks later than the contract that I closed on 6 April 22. I collected a premium of USD2.6k.

So, let’s see if this method of rolling a covered call contract makes sense or it is better to just let the original contract expire on its own, assuming the share price of Tesla does not rise above USD1,200 on the expiration date.

Method 1: Selling 1 Option Contract Without Rolling

Start date: 24 March 22
End date: 29 April 22
Total duration: 36 days
Premium collected: USD2,000
Average Premium Earned Per Month (30-day period): USD1,667 (2000/ 36 x 30)

Method 2: Selling Covered Call Contract As Share Price Dips

Start date: 24 March 22
End date: 13 May 22
Total duration: 50 days
Premium collected: USD3,000 (2,600 + 400)
Average Premium Earned Per Month (30-day period): USD1,800 (3000/ 50 x 30)

As illustrated in the above example, Method 2 produces a higher average monthly yield as compared to Method 1. This is because the maximum gain earned in an option contract is capped by the premium collected from the contract. When the contract expires worthless, the total gain will still be the same whether it is a dollar less than the strike price or a hundred dollars less than the strike price. As the share price continues to dip, the rate of decline in premium becomes disproportional and thus the rate of profit gains drops as well. Thus, rolling makes sense to readjust the call option contract to a lower strike price or a later expiration date to earn more premium on the time value of the contract.

Read more about this strategy in this article:
Why I Choose To Roll My CALL Option Contract When Share Price Falls

Concluding Thoughts

Selling OTM CALL options may yield lower returns as compared to ATM or ITM CALL options. However, it gives the option contract seller more margin for error, especially when the trend reverses and share price starts rising. If share price continues to drop, seller can choose to roll the CALL option contract to a later date or lower strike price to earn more premium.

Keen to learn about options trading but do not wish to pay for expensive courses, this newbie guide will help gain the knowledge and fundamentals to understand options better. And it’s totally free!
The Newbie’s Guide To Options Trading

The LEAPS Strategy has helped me make more than USD120,000 in 2021. Here’s all you need to know about this strategy that can help you increase your wealth exponentially:
The Ultimate LEAPS Options Thread

Looking for ideas on what stocks to invest in or which stocks to trade? You can take reference from what I have been buying or selling. I try to update them as soon as I can in this section, as well as share my thoughts behind executing these trades:

If the bear market in 2022 is making feel depressed as your stocks come tumbling down, read this article to find out how you can use options trading to help you claw back some of your losses as you await market recovery:
How I Do Earn Even When The Stock Market Is Bearish?

Also, check out my trading strategies in different market conditions, whether it is bullish, bearish or volatile:
How Not To Lose Money In Trading? | My Trading Strategies For Bullish, Bearish And Volatile Market

I watched tons of videos on YouTube since 2020 and if you are wondering if there are any useful channels that you can subscribe to for learning market trends, TA, FA, check out this compilation here:
My Secret Weapons For Options Trading: I Watch These YouTube Financial Channels Every Day

I concluded my first year of options trading with more than USD160k of gain, see how I do it and the capital I use for every month to give you a sensing of the percentage yield I get out of my gains:
1st Year Options Trading Recap: The Journey Towards SGD$217,509 Profits In 2021

This blog is as authentic and as transparent as I can share, I do not just show the wins and hide the loss. I have made some very bad decisions in the first 8 years of investing and paid a huge price for them. Here is the loss I have accumulated during these years. I hope you learn some lessons from my mistakes.
I Cut $135,715 Worth Of Losses In The Last 1.5 Months

Want to learn more about Technical Analysis (TA) but find it difficult to grasp the concepts? This article brings you TA at a glance, and helps you understand key terminologies, indicators, and techniques used in TA to equip you with the knowledge that can empower you in your investing/ trading journey.
The Newbie Guide To Technical Analysis (TA)

Excited to start your trading journey or perhaps try out with a paper trading account to build your confidence in trading? Check out this step-by-step to help you get started:
How To Buy Options on Interactive Brokers (Step-By-Step)

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