I always considered it "mission accomplished" when a covered position was called away
I have always looked at it in this light also. However, I am of a cast that likes to experiment. Part of the fun of the markets for me is to try new techniques. I tend to think that such experimentation is worthwhile on the off chance that I can learn something worthwhile. Usually, however, the market demands tuition for such "opportunities".
One of my earliest experiences in the market was as a nineteen year old runner on the Sugar and Coffee Exchange in NY. Commodities futures contracts, like options, have firm expiration dates and the only way you have of extending one is to do a rollover, e.g., Buy March, Sell December, 10 cent premium the March.
So too with options. There's nothing mysterious about the process of exchanging one expiration date for another. I imagine that there are little armies of arbitrageurs working behind the scenes with little else to do but enforce Black- Scholes by doing exactly this. Naturally their transaction costs are a lot lower than mine and I recognize Peter's warning.
I view selling covered calls as selling lottery tickets. Not many of them end up getting exercised. Those few that do tend to drive up premiums even higher because the sharks have tasted the bait. The stock has risen substantially so the options markets embed an even bigger premium to capture the historical volatility. So in theory, a rollover could be quite attractive.
If I were not already Long 500 QLGC and Short 5 Jan 30 calls, it would never occur to me that this is a desirable position to be in with QLGC north of 35. So why not exchange out of it to capture more time premium?
However, in spite of my experimental tendencies, I recognize that the numbers have to work out to justify such a trade.
In the present case, I have done an analysis and determined that if I were to make an exchange of the Jan 30 for the Jan 37.5 and had to buy at present offer and sell at bid, QLGC would have to close above $35.20 (a mere 1.7% margin of safety) for me to be better off than if I do nothing. If QLGC is stagnant for the next 4 weeks, then I make an additional 61 cents, pushing my 7 month return from 3.96 to 4.57 (from 14% to 16.3%). My max profit comes if QLGC goes to 37.5 or higher, whereupon my profit becomes 6.26 (22.3%). As you indicated, it may be time to look for another attractive position.
Peter's admonition about transaction costs are always appropriate when considering fine-tuning one's portfolio. As for the tax dimension, that certainly justifies further research, as the swap happens to result in a lovely end of the year tax loss, even though that is the last thing on my mind. <g>
Sam |
