Strike Price Rolls for Option Writes?

A reader asked: “If you roll short call (or put) options up or down in strike price as the market moves to stay at-the-money, it seems you can collect quite a bit more time premium during a market trend compared to simply holding the original until expiration. I modify this adjustment process during the last week before options expiration by rolling to the next month when time premium gets below $1. In an range-bound market this process does not work as well as sell and hold, but it provides approximately 40-45% protection (trend capture) in the event of a strong trend down (up). Has anyone looked at this concept in detail?”

The Covered Calls Advisor offers some commentary and examples for covered calls, with citations to other sources. Specifically, see

“Rockin’ and Rollin’ — When to ‘Roll Up’ a Covered Call Position”

“A Heuristic Approach for Rolling-Up-and-Out Covered Calls”

For the strike-rolling process you describe to enhance returns over the long run, the incrementally accrued time value must more than offset the combined effects of: (1) the incremental trading frictions (principally bid-ask spreads); and, (2) the increased risk of in-the-money expirations. CXOadvisory.com generally does not have the historical data for backtesting of such options strategies.

Covered Calls Advisor Jeff Partlow reports:

“My current criteria are very close to those suggested in your reader’s question:

1. Roll up (down) when the current equity price is more than 10% above (below) the current strike price.
2. Execute the roll transactions when the equity price is within $0.25 of the new strike price; in other words, very close to at-the-money.
3. Roll within the same expiration month if more than one week (seven calendar days) until expiration, and roll to the next expiration month if one week or less from the current expiration.”

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