Managing a book
How I decide whether to roll
A covered call is creeping into the money. Do you let it get assigned, close it, or roll it out? The answer is mechanical once you know the math.
You sold a 30-DTE covered call. The stock has rallied. Your call is now ITM and trading at $4 of value. You have three options.
- Let it expire ITM and the shares get called away.
- Buy back the call now at a loss and keep the shares.
- Roll the call up and out.
I want to give you the rule I use to decide.
The three-question test
I roll if and only if all three answers are yes:
- Is the new strike above my stock cost basis? If not, I would be locking in a loss against my shares. Let assignment happen instead.
- Is the new expiration at least 14 days further out? If not, the roll does not buy enough time to be worth the friction.
- Does the roll collect a net credit? If not, I am paying to extend a losing trade. Walk away.
If you have to debit the roll, the trade is telling you to close.
The mechanics
A roll is two orders. Buy back the existing short call. Sell a new short call at a higher strike, further out. Most brokers let you place this as a single combined order called a "roll" or "diagonal." Use the combined order so the legs fill together.
What if the test fails
If the test fails on the first question (strike below cost basis), let assignment happen. You will sell the shares at the strike, keep all the premium you collected, and re-enter the stock at the new market price (often higher). That is a profitable round trip.
If the test fails on the third question (no credit possible), the market is telling you the trade is broken. Close the call, accept the loss, and reset.
What to do next
Open the portfolio audit. Any short call within 1 ATR of your strike, with more than 14 days to expiration, will surface a roll suggestion. Read the proposed strike and date, run the three-question test, then act.