Analysis of Roll outs for a VEEV Covered Call Introduction:
VEEV @ $114.65 +1.38 (1.22%) currently has advanced strongly over the last month or two.
In the month of January 2019 VEEV had advanced from about $82 to a recent high of $116. Writing covered calls (CC) has the problem of limiting the up-side gains of a stock. Investor’s compensate for the limited gains by rolling up the strike price to participate in the upward movement of the stock. The CC strike price for VEEV has been raised several times from $95 to $100 to $105 currently. And along the way the $95 protective put has been sold to avoid further time value decay. At the same time a covered call has been written and the stock price allowed to go ITM to provide some downside protection.
We are again considering rolling the $105 strike call as the stock has continued to rise. VEEV is within a point of its high and due for some profit taking. It has advanced 4 days in a row and the last 3 days on high volume. There are several alternative actions to be considered:
1. Do nothing and allow the last written March $105 call to get assigned. Current stats are:
• Current Liquidation Value profit is $451.47 (4.7% return)
• Expiration is in 39 days (3% time value left)
• Expiration profit is $796 (8.2% return)
• Break even @ $96.99
• Cost basis @ $108.66
2. Roll the $105 call to March $110, which keeps the time to expiration constant (39 days) but increased the return with strike price and decreased with time value. Stats are:
• Expiration in 39 days
• Expiration profit at $901 (8.9% return)
• Break even @ $100.99
• Cost basis @ $110.04
3. Roll the $105 call to June $110, which extends the time to expiration out to 137 days and increases the return with both strike price and added time value. Stats are:
• Expiration in 137 days
• Expiration profit at $1,331 (13.8% return)
• Break even $96.69
• Cost basis @ $110.04
Long term we are bullish on VEEV, but short term VEEV is vulnerable to a correction. This poses an additional question: should the roll be done before or wait until after the correction.
VEEV opened the next day strong but hit resistance at the high and began to sell-off. We executed alternative three with VEEV @ $115.60:
Bought back 15-Mar 105 Call @ $12.98
Sold VEEV 21 – Jun 110 Call @ $13.72
The blue line represents the new position and the red line represents the current position as shown by the Simulate Trade Feature from the Position Analysis view in the Portfolio Tools.
This alternative gave up the sure $796 (8.2% return) of the current position for the anticipated continued advance of VEEV and its higher returns. Hopefully this does not turn out to be too greedy!
We liked the idea that the net credit increased but did not like the added time added for the call to expire. Longer term calls do not follow the stock price down as well as shorter term expirations. Therefore, we are also adding a stop loss alert at a $108 stock price. Now only time will tell if this alternative was the best one.
The above analysis was done using the My Portfolio tools on PowerOptions. As you are tracking any position in the Portfolio tools you can link to the Position Analysis view and see potential Roll Out Opportunities, complete with before and after graphs of potential rolls to help with your rolling analysis.