Many people get confused when they hear about the term 'rolling covered calls'. Let me try to explain it using an example: Let's assume that you wanted to go to the grocery store but instead went to car ash. Just like that, the same thing happens with covered calls.
Let's say that you buy ABC stock at a $50 price with the hope that it will raise modesty. Now, you also sell a covered call of ABC at $55 with the hope that it will give you good returns. Then, you read an online article which highlights how the ABC company has good growth prospects. This makes you believe that ABC stock can reach $70 price in the next 3 months. In this scenario, that stock you initially bought for modest profit now has the chance to give you bigger turns.
As you can see from this example, a covered call position is all about making an initial forecast and then changing it based on new information or external circumstances. Now there is a good chance that the new objective may not be correct, or it could be correct. Despite the outcome, one thing is for certain, and that includes taking action.
A Change In Objective
In short, covered call rollover is all about a change in the initial objective or forecast. And it is common among traders to utilize this strategy when their forecast about a particular asset changes.
However, let's not forget that there is no fixed rule that tells us when a trader should use this strategy... Should the current covered call be closed and then replaced with a new one? If the answer is yes, then what about the higher strike price or a later expiration date of the new call? All of these questions can arise from this scenario and there is no right or wrong answer.