I knew little about rolling options before starting my journey. In most cases when I was deep in the money, I had shares assigned to me. Since starting my journey I have learned a lot about how to both close and roll positions. This has allowed me to avoid any big losses.
Over the last couple of months, I have had several options contracts move into the money. Meaning the stock price was equal to or higher than the strike price for a call option. The reverse is true for a put option. It is considered in the money when the stock price is less than or equal to the strike price. I am an option seller so when the option is in the money, I run the risk of having the stock assigned. Meaning a hundred shares are sold to the option purchaser at the agreed to strike price.
I typically do not like to have my shares assigned so I try to roll the option out another 30 to 60 days. I only do this if I can get more premium and move to a higher price for a call and a lower price for a put. My hope is that the price will come down and I will again be out of the money. The risk I am running is that the stock will continue to move deeper in the money, and I will end up with a big loss.
When you roll you buy back the existing option contract and sell a new one at a better price with an expiration further out into the future. This can be confusing. Let me clarify things by discussing what I did with my ARKK options where the stock price increased above my strike price. I am going to share all last year’s option trades in ARKK.
1st Trade – October 6th sold a covered call option on ARKK at $106 for $333. The option expired on 11/20. This has been one of my most profitable trades since the beginning of my journey.
2nd Trade – November 23rd sold another covered call on ARKK at $115 expiring on 1/15/21 and collected $250 in premium. For both first two trades, I took on more risk than I should have. Both were close to .30 or 70% probability. The price of ARKK increased in late November to over $125 forcing my option to be in the money.
3rd Trade – Rolled my 2nd trade by buying it back and sold another covered call on January 13th. The new covered ARKK option call had a strike price of $122.96 expiring on 6/18/21. I gained another $141 in premium. One thing to note here. Since I own the underlying shares, I am just trying to manage my profits and keep gaining a premium. My hope is that when the market has a pullback, I will be able to close the trade out of the money.
4th Trade – On the 2nd of February I Rolled my 3rd trade again. I bought back my 3rd trade and sold another covered call expiring on 9/17/21. I was able to increase the strike price up to $127 and gained another $191 in premium.
At this point, I have been able to move the strike up from $115 to $127 and in the process gained $582 in premium on all the trades. Again, my hope is that the ARKK’s price will come back down below $127. ARKK’s biggest holding is Tesla and it has grown several hundred percent during this period and has a PE of 1300. My research is that Tesla will come back to reality and so will ARKK. My guess is the next correction or large pullback will bring ARKK back around $120 or so. However, if I keep the covered call and let it be assigned, I will get $12,700 for the shares. Considering my cost on them of $4,496. I purchased most of the shares back in 2018. So, for an increase of 282% over three years or a 94% yearly return. Not too shabby.
Boy, I wish I could end the post here. However, I would be doing everyone a disservice if I did. I also purchased an ARKK Call Credit spread that has gotten me into a bit of a pickle. I do not own the underlying shares for the credit spread. So, if it gets assigned, I will have to purchase the shares and then they would be assigned. I have learned that it is much easier rolling covered calls compared to credit call spreads. Below are the credit spread trades.
1st Trade – On November 5th I did a credit spread by selling a call at $115 expiring on 12/18. At the same time, I purchased a call option at $130 also expiring on 12/18. The net premium for the trade was $89. This trade had a lower delta of .168.
2nd Trade – On December 14th I rolled the credit spread out to 1/15/21. I closed both existing trades and sold a new call option at $115 and purchased a new outer call at $140. I did gain another $103 in premium. However, I increased my margin on the trade and the risk of a big loss.
3rd Trade – On January 13th, 2021 I rolled the credit spread out to 3/19/21. I closed the existing trades and sold a new call at $117.96 and purchased a call at $177.96. I picked up another $195 of premium. However, I again widened the spread to gain a premium. However, I did get a slightly higher price.
At the time of writing this post, I am in a hole on the spread of over $3k. I am in the process of trying to figure out what to do. One option is to continue to roll and keep increasing the strike prices. However, I have found it difficult to find premium due to how wide the spread is. Another option I am considering is to keep rolling the spread and if we get a pullback purchase the shares and convert it into a covered call. We did have a small pullback in January (-3% for the overall market). ARKK went from $150 to $135 a share. However, it is now back over $150 again.
Since 1920 the market has pulled back 10% every 16 months. A 5% pullback in the market occurs every four months. I believe the market is overvalued and we will get a pullback in the next couple of months. Let me know what you think and if you have any advice that might help me get out of my mess?
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Update on the $117.96 call trade. I was able to roll it again to 5/21/21 to a strike price of $125. Before the option expired ARKK went through a correction and I was able to close it for $4. Rolling one more time did the trick and allowed me to have enough time to get out of the vertical call credit spread.
Also, I created a YouTube video in May 2021 that discusses rolling positions. I go into more detail on how to roll.
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