One of the most popular options strategies for conservative equity investors is selling covered calls.

Selling calls on a one to one ratio with shares you already own is a great way to earn extra income on a stock that seems to be trading in a predictable range, and if the stock rallies through the strike of the calls that you’ve sold before they expire and the stock is called away, not only have you sold it at a profit, you also collected the premium on the calls, adding to your profits.

But what if you didn’t really want to sell the shares?

You can do what professional traders do and roll the calls “up and out.”

Here’s an example:

In December, Micron (MU Quick QuoteMU - Free Report) was trading in a tight range between $70 and $75 a share. Let’s assume you owned 500 shares. At the beginning of 2021, you decided to make a little bit of extra income on that holding during what was looking to be a relatively uneventful first quarter, so you sold 5 calls that expire on April 21^st with a strike of $90 and you collected $3/each in premium for a total credit of $1500.

Here is the risk profile for the trade immediately after you sold the calls:

The stock bounced around a bit in January and then started a slow, steady rally.

The calls you sold were decaying in value every day and it looked like you would collect the entire premium.

The stock just kept rallying however…

The calls you sold now have 22 days until expiration and now look like they might end up above your strike, in which case you’d be selling the 500 shares at $90. Considering the stock was trading at $70 in January when you executed the option sale, this will still have been a very successful trade. You will have made $20 – or 28% in four months - on the stock, plus an additional $1500 in option premium.

Not too bad, right?

Except it’s possible that the recent rally has shown you that the chipmakers are setting up for a more sustained upward move. After a great quarterly report on Thursday, MU shares have gained better than 3%.

Maybe you’re not ready to give up on MU yet, even though you’ve had an impressive recent profit.

Roll those April calls up and out.

In a single spread trade, you’ll buy back the APR 90 calls and simultaneously sell the MAY 95 calls.

The options prices today are:

                                           Bid                       Offer

APR21 90 Call                  $3.55                     $3.55

MAY21 95 Call                  $3.90                     $4.00

Because you’d be entering the order as a spread, you can most likely execute the trade inside the bid/ask spread for a credit of $0.40 – or $200 in total on a 5-lot.

Here is the risk profile of the updated position today:

You'll notice it's basically the same as the previous risk profile, except shifted to the right (a higher underling price).

You’d then have basically the same position as you had when you started, you’d still own the shares and you’d be short 5 calls against it with 45 days left until expiration – you get to keep owning the shares after that sensational earnings announcement and you’ve already collected $1,700 in additional income from options premiums.

-Dave

David Borun runs the Zacks Marijuana Innovators Portfolio as well as the Black Box Trading Service and the Short Sell List Trading Service. Want to see more articles from this author? Scroll up to the top of this article and click the “+Follow” button to get an email each time a new article is published.

Want to apply this winning option strategy and others to your trading? Then be sure to check out our Zacks Options Trader service.