Morning Dave (great name).
Lets say you sold CC for BRCM April 230's and by april options expiration, brcm is valued at 238. You will be taken out and be paid 230 for your shares. However, lets say you want to keep those shares, or wish to avoid selling those share, for whatever reason, you can roll the option over which involves buying back you option cc and then selling another cc later on in time (the purpose of which is to gain the time component of the premium). As you approach options expiration, the time value decreases down to 0. In order to maximize the time component differential, you usually have to wait until the end of the friday of options expiration to maximize the valuation difference. Because of the time constraints of beating the clock, especially at around 3:45 pm on options expiration friday, you are much better off doing this with a live broker, this way s/he can determine with much greater speed whether you bought back that call, or not and at what price.
So you sold the april BRCM 230's, at it's trading at 238 by 3:45 pm on that last friday afternoon of options expiration. You call your broker and have him/her check the options chain and see what it would cost to buy back the option (usually around the difference and change between the srike price and the value of the stock with some miniscule time left on it. So you buy them back at $9.00 per, Now you and your broker check the options chain and see what you can sell to make up for the $9.00 cost to buy back those calls. You may find that you can get $12.00 if you sold the May 250's. So now you are advancing your strike price from 4/230 to 5/250 (20 point gain) and in addition, you also receive an additional $3.00 per share "for your troubles". You can also roll the calls 1 month 2 months, etc for as long as you want. Lets say that by the end of May BRCM is trading at 260. Well you can roll the calls again to lets say the June 280's and recieve a $1.00 bonus. You can keep doing this for as long as you want, until the comes a massive correction, then you can either buy back these calls, or wait until you hit the month of optsions expiration where the stock closes below your strike price.
Hope this helps,
David |
