Wednesday, June 20, 2012

Concept of rolling covered calls for grains

Below is an example of what one might do if they sold a covered call in soybeans.

On March 1st July soybeans where trading at about 13.30; on this same day you could have sold a 14.00 July bean call for about 38 cents

fast forward to today June 20th; July beans are trading around 14.46; so your call is now in the money.  Good thing versus beans going down and never getting to the 14.00; but it also means that perhaps you sold too early if the rally is going to continue.

So what now?

One strategy that can be used is what is referred to as rolling out the short call option.

For about the same price you have a couple different options that allow you to get a higher futures price despite the present inverse.

First off you buy back your short 14.00 July call and then you go and sell one of the following for about the same price.

You can sell the 14.60 Sept call for the same price as the July 14.00 call; thus raising your max price by 50 cents; the bad thing is you have opened back up downside risk and passed making a sale that at one time was a very good price target.

You also are going threw an inverse that makes this move more tricky as the Sept futures are about 35 cents less then the July futures.

The other option is rolling out to a Nov 14.80 call for once again about even money.

The thing that rolling out the option does is it gives you a chance to get a better number then your first thought when you sold the call option back in March.

When you sold the call option on March 1st you where hoping to make a sale about 70 cents above the market.  Via rolling you take a short call option from nearly 50 cents in the money to nearly a dollar out of the money in the Nov 14.80 call example from above.

Keep in mind that with the rolling of a short option you are also opening up downside risk and not making a sale that at one time was very good.

1 comment:

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