Option Investor
Educational Article

Rolling up the Long call

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Many times as traders we find ourselves sitting on a very profitable trade when we are long trading either calls or puts. For example XYZ company is trading at a price of $45 and you decided to buy10 of the XYZ October $45 calls at a price of $3.00 each or $300 each. The next few days the stock has really down well it closes at around $52 a share. You call options are worth roughly $8.70 or $875 each. You know in your heart, that this stock potentially could go much higher, but you sure would hate to leave such a nice profit on the table only to be disappointed if the stock mad a major pullback. Of course you could sell half of your position and stay long your remaining 5 contracts of the XYZ October $45 call and know that what ever happens you are only risking your profit at this point. However, if the stock continues to move you will always second guess yourself about cutting your contracts from 10 to 5 and making half as much as you might have had you stayed long. A very nice dilemma to find yourself in, but unfortunately it is still a dilemma. What should you do? What could you do? Well here is a simple little strategy that might take some money off the table, but still give you the opportunity to participate in the profits if XYZ continues to go up. What you might consider is to sell your XYZ October 45 Calls for the $8.75 they are currently selling for and then buying the XYZ October 50 Calls for roughly $4.00 a contract or $400. What you now have done is made a small profit of $1.75 or $175 a contract or a net profit of $1175 (10 X $175 = $1,175) and you are long 10 contracts of the October 50 call with XYZ selling at $52. Why would you do something like that?

There are several reasons.

1. Your stock has moved deep into the money and into the money past the next strike price.
In this case your original October $45 call moved past the next strike price of $50. Now
With $45 over 7 points in the money, your option will of course move closer to parity with
The underlying stock because of its increase in DELTA (you will learn about this in latter
Readings. However, because of this higher parity, you also risk a greater lost in premium
If the underlying security should start to sell off, because you will start losing more of the intrinsic value that your option has gained since it is now deeper in the money. So what you want to do is roll the risk up to the next strike price and pocket the profit, while still maintaining your long call position in XYZ.


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2. Now you only risk a majority of the profit you made and none of your original capital you laid out for this trade, and even if there is bad news or a negative occurrence with the underlying XYZ, you still have a small profit already taken off the table and you still can sell your XYZ $50 calls for whatever they are worth and that credit will increase your net profit.

3. This is all done with profit and no risk to your original cash outlay. Remember, your XYZ October $50 options have less intrinsic value tied up in their premium than the XYZ October $45 calls that you initially purchased. So your $50 calls have less risk because you have less market value tied up in your option positions.

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