How to Roll Covered Calls

Covered calls can be an excellent way to generate extra income from stocks but they don’t always go exactly as planned.

Fortunately, covered calls can be rolled when the underlying stock moves in an unexpected or unfavorable way.

If you’re wondering how to roll covered calls, it’s relatively simple. To roll covered calls you buy back the call option previously sold and sell another call option with a different expiration date or strike price.

how to roll covered calls

There are many strike and time frame options when rolling covered calls. In this post, you’ll see how to roll covered calls to get the desired outcome you want in various situations.

While I’m an AFC® (Accredited Financial Counselor) the information for this post comes from my experience selling hundreds of covered calls over the past fourteen years in my brokerage account.

Here at Retire Certain, I like to briefly address investment risk around the topic first. While covered calls can be an excellent income stream for stock investors, they only make sense when stock ownership aligns with your overall wealth plan from both a risk and return perspective.

As you’ll see in this post, rolling covered calls can take advantage of a special feature options have that can tilt the probability of a successful outcome in their favor, so keep reading.


In a hurry? This information is organized in two tables later in this post so scroll down to take a quick look. 


How to Buy Back Covered Calls

The first step in rolling covered calls is to buy back the call option.

This involves simply entering a Buy to Close order for the number of contracts outstanding. See the red arrow in the image below from my brokerage account.


You’ll probably need to pay an amount at or close to the Ask price for a low volume option, which many options are. (See the gold arrow in the image above.)

Note that some brokers charge a flat fee per option trade plus a certain amount per contract, such as $6.95 per trade plus $.25 per contract. For this reason, it may make sense to place the order close to the Ask price, so the entire position gets filled at once, vs one contract at a time. You can quickly do the math to see what is most beneficial for you.

Also note that low volume option orders are harder to fill than actively traded options so be aware that buying back an option sold for a covered call can be a challenge for low volume options.

The second step in rolling a covered call is to sell the replacement option contract. This will involve some analysis and decisions, so let’s go there next.


What Happens When You Roll A Covered Call?

What happens when you roll a covered call depends on the strike price and expiration date selected; these two factors affect the outcome and are selected based on the reason you’re rolling the call in the first place.

Your reason may be to buy more time before a call gets exercised, to avoid a stock getting called away prior to dividend payment, to try to squeeze more capital gains out of a stock position, or other reason.

The strategy you use, such as rolling out, up, or back, will depend on your desired outcome. Therefore, let’s look at how to roll covered calls for a variety of results so you’ll know which strike price and expiry date to choose.

If you want a quick refresher first, read my post how do covered calls work?


Rolling Out Covered Calls

Rolling out covered calls is the most common option rolling strategy. Rolling back covered calls is another term used for rolling out covered calls.

One of the best things about rolling covered calls is the fact that it allows us to buy more time when needed; you can’t say that about many things in life.

The way to buy time with covered calls is to sell a call option that is further out of the money than the original option sold.

For example, if you bought back a March call with a $50 strike and sold an April call with a $50 strike, you’d buy yourself another month before option expiration.

In this case, you rolled the covered call one month out with the same strike price, perhaps because you thought the stock was about to drop. This gave you another month to see if it did.

If the stock dropped as you thought, you could buy back the April option after it does drop, and sell a May, June, or later call option. Sometimes looking at company news or a stock chart helps know how far out to sell covered calls when rolling.

In this example, we only got more time by rolling out the covered call. We could, however, sell a call option with a different strike price than the original option, thereby affecting the profit or loss we will have on the underlying stock if the new option gets exercised.

Once the time frame is chosen, the question become which option strike price to use when you sell another call option.

Note that rolling out covered calls refers to the option date even though the term used for covered call strategies with higher strike prices than market prices is out of the money covered calls.

You can roll up or roll down when you roll covered calls. Let’s look at an example of each of these possibilities.


When To Roll Up Covered Calls

You’ll roll up the covered call when you want the opportunity for a higher capital gain on the stock position. This is accomplished by selling an option with a higher strike than the option you bought back.

In our previous example, the investor might replace the original call option with a $50 strike with a call option with a $52.50 strike to roll up the covered call.

Or he might roll up the covered call even more by selling an option with a $55 strike. This would allow him to keep more of the underlying stock’s gain should one occur.

Investors most commonly roll up covered calls out of the money further when they want the potential to keep more of the underlying stock’s capital gain.

Covered calls are frequently rolled up and out with an extra benefit, as you’ll see ahead with an example.


Rolling Covered Calls Up and Out

Let’s say an investor sells an October call option with a $20 strike on an underlying stock that cost $20.

The stock goes to $20.50 before option expiration.

The option seller wants to keep the stock gain, so he rolls the covered call up and out.

He buys back the October call option with the $20 strike and sells a January call option with a $21 strike.

He has rolled the covered call up and out in this case. The fantastic thing about rolling calls both up and out is that the replacement option has more time value than the original option sold which is being bought back. This is because it is further out in time.

Here’s where the magic of options comes in: Sometimes rolling options up and out can result in increasing the capital gain potential at no cost due to the higher time value of the replacement option.


Rolling Down Covered Calls

An investor may occasionally choose to roll down a covered call.

In our previous example, the investor may buy back the original $20 call option and sell a call option with a $19 strike to roll down the covered call.

You may be wondering why anyone in their right mind would ever do this since it relinquishes some of the capital gains potential on the underlying stock.

Rolling down covered calls is done when the price of the stock has fallen so much that an acceptable premium cannot be gotten from selling an option with a higher strike. 

Remember, when selling covered calls, the further out of the money the call’s strike price is, the less income the investor gets from selling the call option.

On the other hand, a closer option strike results in higher call option premiums for the seller. It’s important to remember this is how covered calls work.

Rolling down covered calls is usually done when the market price of the underlying stock has dropped but it’s not always a losing situation. Next, let’s see when it’s not.


Rolling Down Covered Calls on Buy Write Positions

Falling stock prices and bear markets present the biggest problems with covered calls for investors that buy stocks and sell covered calls immediately after buying the stock.

This is called a buy write covered call strategy. The stock is bought, and the option is sold simultaneously.

Covered call writers who use this buy write method are under pressure for the stock to maintain its value, particularly for an investor living off covered calls. Ideally, the option will be exercised, and the stock is sold at the strike price. This frees investment capital so another buy write covered call can be done for the next month. This is bliss for buy write covered call sellers.

Buy write covered calls are not a bad strategy, but they can need more management than out of the money covered calls sold on long term stock positions which often get sold profitably during option exercise; this is bliss for both investors and covered call sellers.

When might this nirvana occur? Keep reading to find out.


Rolling Down Covered Calls on Old Positions

Stocks usually increase over long periods of time. Long term investors who have accumulated large positions in stocks with a cost far below the market value can sell covered calls without the pressure for stocks to continue to trade near the option strike price until option expiration.

This is because the option can be exercised, and the investor can still have a significant capital gain on the underlying stock, logically assuming his stock cost is low since it’s a long term holding.

I have seen this with several retired financial coaching clients who have hundreds of shares of stock that cost a fraction of the market price.

In this scenario, the covered call writer who rolls down does relinquish some of the stock’s upside, but he isn’t forced to sell the stock at a loss.

Such an investor might roll down covered calls because doing so will result in higher income by selling the call option with a lower strike.

In this example, most likely, the original call could be bought back at a profit, too, since time decay has occurred, and the stock’s price has declined. This is what I call a double dipper.


Rolling Down and Out

When rolling down and out, an option is sold with a lower strike price and a further out expiry date than the original option had.

This allows the investor to benefit from time decay on the replacement option sold.

Let’s say an investor bought AMGN over the years with a $75 average cost.

To generate some extra income, in August, he sold a December out of the money call option with a $220 strike when AMGN was selling at $215 a share.

The next week, AMGN stock dropped to $ 205.

The investor decided to roll down and out to take advantage of the price movement. He bought back the December call option with the $220 strike at a profit and sold a November call option with a $210 strike.

If the call option gets exercised, the investor is okay with selling his AMGN shares at $210 since his average cost is $75.  Even better, since you can sell covered calls in an IRA, the investor chose to do so with AMGN. Therefore, he won’t have to pay taxes on the large stock gain and he can purchase the stock again should he choose.

Unfortunately, many investors don’t have huge long term stock holdings like these retirees, and they end up needing to roll a losing call option. Let’s go there next.

How to Roll Covered Calls

StrategyAction to Take
Rolling OutSell Call Option with Later Expiration Date
Rolling UpSell Call Option with Higher Strike Price
Rolling Up and OutSell Call Option with Later Date + Higher Strike
Rolling DownSell Option with Lower Strike Price
Rolling Down and OutSell Option with Later Date + Lower Strike
Above table shows how to roll covered calls with replacement call option in different situations


Rolling A Losing Call Option

The reality is that rolling a losing call option is common.

Sometimes investors sell call options naked and incur losses, but we’re focused on rolling a losing call option in relation to covered call selling in this post.

With covered call strategies, a losing call option occurs when the market price of the underlying stock rises above the option strike price.

This might happen because the investor thought the stock was going to drop so he used an in the money covered call with a strike near the price where he thought the stock would go; other times a stock gaps up on news or with the stock market as a whole.

Sometimes rolling up and out with the replacement option will lessen or eliminate the loss from the original call option due to the time value advantage presented earlier.

Frequently, however, covered call sellers feel like a covered call position is losing money because the stock price has risen above the strike price when it really isn’t. If the overall covered call position makes money, however, there is not a loss.

There is psychology around knowing the stock could have been sold at a higher price when it rises above the strike price on the option sold.  As I advise financial coaching clients, truly understand your investments so you can evaluate the potential outcomes before investing in anything.

If I sell a 4 to 6 week covered call position and make 2% to 3%, I’m happy, especially if the option is exercised; I let go of thinking that I left money on the table should the stock rise above the strike price because I know what a 2% return over 4 to 6 weeks annualized is, and how hard it is to achieve.


Rolling Deep In The Money Calls

Rolling deep in the money calls can be necessary when the investor has been rolling calls on a rising stock for a long time.

Or maybe the position was initially structured as a deep in the money covered call anticipating the underlying stock would drop.

Regardless of the reason, rolling deep in the money calls can be challenging and the effort can feel defeating.

Deep in the money covered calls can be hard to successfully roll up and out as shown earlier.


Best Time To Roll ITM Covered Calls

The best time to roll an in the money covered call is usually when there is little to no time value in the option being bought back.

Also, investors can buy back call options when the stock is near the bottom of the channel. This allows the option to be bought back at a lower price.

The investor can then decide whether to sell another call option right away or wait to see if the stock returns near the top of the channel before selling the replacement option.


How Long Can You Roll A Covered Call?

You can roll a covered call as long as you want. Rolling covered calls can even be profitable when investors can take advantage of time decay.

Investors should, however, consider the following factors in deciding how long to roll a covered call:

  • The time it takes to manage an undesirable position
  • If rolling the call option will result in exiting a profitable position eventually
  • The capital tied up when rolling a covered call vs. a brand new position

As with all investments, sometimes it’s best to close covered call positions, even when it will result in a loss.


Can You Lose Money Rolling Covered Calls?

Some investors ask if you can lose money rolling covered calls; the answer is a definite yes, you can lose money.

Most often the loss comes from being short an option with a strike price lower than the underlying stock’s price. Losses can also occur from time decay when an option is held for too long.

Other times, however, an investor will buy back a call option at a loss to avoid this from occurring.

It is not uncommon for an investor to go ahead and take a loss on rolling the covered call when he believes the stock has good upside potential.


When To Roll Covered Calls

Knowing when to roll covered calls can be tricky.

Selling calls near the top of the channel on a day when the underlying stock is up over the prior day’s close yields a higher premium than selling call options on a down day near the bottom of the stock’s channel. The opposite is true when buying an option back. The difference is often significant.

Therefore, when rolling call options, an investor is faced with the decision of whether to buy back the original call on a down day and sell the new call on a subsequent up day in an effort to gain a higher profit.

Even imperfect action can improve results since covered call strategies aren’t short term the way day trading is. I like to say that aside from bear markets, covered calls are very forgiving, and rolling covered calls makes them even more so.

The blue arrows on the image below indicate the up days near the top of the channel and the red arrows indicate the down days near the bottom of the channel.

when to roll covered calls - up vs down days

Understanding how to read a stock chart helps investors who want to sell calls on up days and buy calls on down days. This is a simple daily chart of SPY.

The reality is that is it hard to know if stocks will go up or down, but using a stock chart can provide valuable insights.

Why + When to Roll Covered Calls

Covered Call Rolling StrategyWhy DoneWhen Done
Rolling Out Buy More TimeStock Price Rose Above Strike or Time Decay
Rolling UpIncrease Stock Capital Gain Potential Stock Price Rose Above Strike
Rolling Up and Out Buy Time + Increase Stock Gain Potential Stock Price Rose Above Strike
Rolling Down Increase Option Premium, Double DipStock Price Fell Below Below Strike
Rolling Down and Out Increase Option Premium + Buy Time, Double DipStock Price Fell
Table shows why and when to roll covered calls for various situations.


Rolling Covered Calls Summary

In my experience, rolling covered calls can work well in a variety of different situations.

Rolling up and out usually has good results on moderately upward trending stocks. The income generated by selling an option with a slightly higher time value with the next option strike up often pays for the option that was bought back.

In other words, there is breakeven on the option trades when rolling the covered call up and out. The benefit comes from the fact that the stock will be exercised at the higher strike price.

Rolling covered calls down can even improve results when stocks drop in price even though this is not the ideal outcome for most covered call strategies.

The beauty of rolling covered calls is that it can help when covered call positions don’t go as planned. This makes the effort in learning how to roll covered calls properly worthwhile.


The information on this website is for education only and is not to be construed as personal financial advice.