Covered Calls and Cash Secured Puts (Part 20)

In the last post of this blog series, I illustrated the adjustment technique of rolling out as a way to continue a CC/CSP trade. Rolling out may also be used to delay assignment or avoid assignment altogether.

The Part 19 example showed how rolling out may be used to continue a successful CC/CSP trade in a sideways market.

Rolling out may also be used if the market trades lower, thereby putting the CSP ITM. Recall that a short option is at risk for assignment when time value approaches zero. This typically occurs near expiration or when the option goes deep ITM. Rolling out refreshes the trade by closing an option with little time value remaining and opening one with more time value (read: profit potential!) remaining. The trade profits through time decay provided that intrinsic value decreases or remains constant.

Rolling out provides more time for the position to work in my favor. An ITM CSP approaching expiration becomes a longer-dated ITM CSP after rolling out. The position continues to be ITM and this often makes traders uncomfortable. I now have more time for the market to reverse and turn higher, though. If the stock price has rallied above the short strike at the new expiration date then the CSP will expire worthless and I will realize total profit without ever being assigned.

If I don’t want to roll out when my CSP goes ITM then I can take assignment. This is not a bad outcome because by definition, I have cash available in my account to purchase the stock. I can then continue the trade by selling a CC against it. Since this is a synthetically-equivalent trade to the CSP, the choice is yours.

One reason to prefer the CC over CSP might be dividends. I will address this point in a later post.