Please Note: These recommended trades only apply to those Personal Finance Income Plus members who already have positions in the mentioned stocks and covered calls. Do NOT do these trades as initial positions.

1. Sell Diagonal Spread on Cameco (NYSE: CCJ)

and

“Sell to Open” September $22 Call

Option Symbols: CCJ120616C24 and CCJ120922C22

Limit Order Price: Net credit of $0.80 or more ($80 per spread)

If your broker doesn’t allow option spreads, then you’ll have to do two separate single-option trades:

(a) “Buy to close” June $24 call for a debit of $0.05 or less ($5 per contract)


(b) “Sell to open” September $22 call for a credit of $0.85 or more ($85 per contract)

Directional View for Underlying Stock: Neutral to bullish

Personal Finance Portfolio: Growth

•    Tell your broker:

For a diagonal spread (preferred)

I’d like to enter an option spread order on Cameco (CCJ) stock. Specifically, I want to buy to close the June $24 call and sell to open the September $22 call for a net credit of $0.80 per share or more.

• For a two-part trade:

I’d like to buy to close the June $24 call on Cameco (CCJ) stock for a debit of $0.05 per share or less.

I’d like to sell to open the September $22 call on Cameco (CCJ) stock for a credit of $0.85 per share or more.

Please note: The important thing is to achieve a net credit on the roll (i.e., both trades) of $0.80 or more. The specific limit prices of the individual “buy to close” and “sell to open” trades are just starting points and should be adjusted as needed, keeping the net credit of the overall roll in mind.

2. Sell Diagonal Spread on Chevron (NYSE: CVX)

and

“Sell to Open” September $105 Call

Option Symbols: CVX120616C110 and CVX120922C105

Limit Order Price: Net credit of $2.55 or more ($255 per spread)

If your broker doesn’t allow option spreads, then you’ll have to do two separate single-option trades:

(a) “Buy to close” June $110 call for a debit of $0.02 or less ($2 per contract)


(b) “Sell to open” September $105 call for a credit of $2.57 or more ($257 per contract)

Directional View for Underlying Stock: Neutral to bullish

Personal Finance Portfolio: Income

•    Tell your broker:

For a diagonal spread (preferred)

I’d like to enter an option spread order on Chevron (CVX) stock. Specifically, I want to buy to close the June $110 call and sell to open the September $105 call for a net credit of $2.55 per share or more.

• For a two-part trade:

I’d like to buy to close the June $110 call on Chevron (CVX) stock for a debit of $0.02 per share or less.

I’d like to sell to open the September $105 call on Chevron (CVX) stock for a credit of $2.57 per share or more.

Please note: The important thing is to achieve a net credit on the roll (i.e., both trades) of $2.55 or more. The specific limit prices of the individual “buy to close” and “sell to open” trades are just starting points and should be adjusted as needed, keeping the net credit of the overall roll in mind.

3. Sell Diagonal Spread on Enterprise Products Partners (NYSE: EPD)

and

“Sell to Open” September $50 Call

Option Symbols: EPD120616C52.5 and EPD120922C50

Limit Order Price: Net credit of $1.25 or more ($125 per spread)

If your broker doesn’t allow option spreads, then you’ll have to do two separate single-option trades:

(a) “Buy to close” June $52.50 call for a debit of $0.05 or less ($5 per contract)


(b) “Sell to open” September $50 call for a credit of $1.30 or more ($130 per contract)

Directional View for Underlying Stock: Neutral to bullish

Personal Finance Portfolio: Income

•    Tell your broker:

For a diagonal spread (preferred)

I’d like to enter an option spread order on Enterprise Products Partners (EPD) stock. Specifically, I want to buy to close the June $52.50 call and sell to open the September $50 call for a net credit of $1.25 per share or more.

• For a two-part trade:

I’d like to buy to close the June $52.50 call on Enterprise Products Partners (EPD) stock for a debit of $0.05 per share or less.

I’d like to sell to open the September $50 call on Enterprise Products Partners (EPD) stock for a credit of $1.30 per share or more.

Please note: The important thing is to achieve a net credit on the roll (i.e., both trades) of $1.25 or more. The specific limit prices of the individual “buy to close” and “sell to open” trades are just starting points and should be adjusted as needed, keeping the net credit of the overall roll in mind.

4. Sell Diagonal Spread on Verizon Communications (NYSE: VZ)

and

“Sell to Open” September $43 Call

Option Symbols: VZ120616C39 and VZ120922C43

Limit Order Price: Net debit of $2.70 or less ($270 per spread)

If your broker doesn’t allow option spreads, then you’ll have to do two separate single-option trades:

(a) “Buy to close” June $39 call for a debit of $4.00 or less ($400 per contract)


(b) “Sell to open” September $43 call for a credit of $1.30 or more ($130 per contract)

Directional View for Underlying Stock: Neutral

Personal Finance Portfolio: Income

•    Tell your broker:

For a diagonal spread (preferred)

I’d like to enter an option spread order on Verizon (VZ) stock. Specifically, I want to buy to close the June $39 call and sell to open the September $43 call for a net debit of $2.70 per share or less.

• For a two-part trade:

I’d like to buy to close the June $39 call on Verizon (VZ) stock for a debit of $4.00 per share or less.

I’d like to sell to open the September $43 call on Verizon (VZ) stock for a credit of $1.30 per share or more.

Please note: The important thing is to achieve a net debit on the roll (i.e., both trades) of $2.70 or less. The specific limit prices of the individual “buy to close” and “sell to open” trades are just starting points and should be adjusted as needed, keeping the net debit of the overall roll in mind.

Rolling Verizon for a Debit?

An important concept to remember is that the $2.70 per share debit on this roll is not a loss. As the owner of a stock currently trading at $42.99, you have captured the full $3.99 in price appreciation that Verizon stock has achieved above the June $39 call strike. The debit price paid for rolling the covered call reflects the stock owner/call seller’s obligation to give that $3.99 in share price appreciation to whomever owns the June $39 call.

In other words, the $3.99 per share is a forfeited gain–not a loss. By selling the September $43 call for $1.30, we are taking back $1.30 of the forfeited share price gain, leaving us with a net debit (i.e., forfeited gain) of only $2.70. 

Over time, academic studies have proved that insuring your portfolio from price declines with covered calls is far more important to long-term wealth generation than simply owning the stock and benefiting fully from every gain in share price.

Stocks fluctuate in price and don’t always rise. When stock prices fall or remain stagnant, rolling covered calls brings in credits. Over the long term, the credits received from rolling covered calls far exceed the infrequent debits paid to roll. In addition, by rolling the covered call for a debit rather than allowing the stock to get called away, you continue to receive stock dividends, which are substantial for income stocks like Verizon!

Bottom line: Don’t be concerned about rolling a Verizon covered call for a debit now and then. It’s just part and parcel of the journey to higher returns.

Price Adjustment Regarding Verizon Trade

Unlike when we open an initial trade, this trade involves closing an in-the-money call option before it gets exercised early against us. Consequently, we do not have the luxury of patience and possibly passing on the trade (unless you are willing to sell your Verizon stock). We will need to be flexible with our limit price and adjust if necessary as we get nearer to the market’s close on Friday, June 15th.

The limit debit price of $2.70 I suggest above is a starting point. If it doesn’t fill within a few hours, I recommend raising the limit debit price by a few cents per share and waiting a few hours. If this adjusted limit price doesn’t fill, adjust again by a few more cents. Repeat the process until you get filled.

For the other three trades (CCJ, CVX, EPD), there is no risk of getting the underlying stock called away, so you can be more stubborn about your limit prices for the roll credit. If any of the limit credit prices don’t fill, you can wait until next week to sell a September covered call.

Why Roll Out-of-the-Money Covered Calls Set to Expire Worthless?

The few cents per share it costs to close out an expiring covered call prior to expiration is usually outweighed by the time-value decay (i.e., negative theta) suffered by the new covered call during the several days of waiting for the original option to expire before initiating the new position. For example, right now you can sell the Chevron September $105 call for $2.57, but–even if the stock price doesn’t change–there is a risk you might only be able to sell the September $105 call next week for $2.49.

The theta of the September $105 call option is 0.02, which means that–everything else staying equal–the call option’s value declines by two cents per day. Since today is Thursday, it is four days until next Monday, which means that the value of the September $105 call will decline by $0.08 between now and next Monday just from time decay alone (4 days times $0.02 of time decay per day).That eight cents of lost income would be more than the $0.02 cost needed to close out the June $110 call now. Although we can’t be certain that this loss of September call income will happen, it is definitely a possibility if the stock price does not move between now and next week.

I realize there is pleasure in watching an option you have sold expire worthless, but the goal is maximizing the amount of income from trading covered calls. For example, I would rather collect $2.55 now by purchasing to close the Chevron June $110 call for $0.02 and selling the Chevron September $105 for $2.57 than collect only $2.49 next Monday (after the June $110 call expires worthless while the September $105 call has dropped in value):

Possible Scenario for Chevron Call Options if Stock Price Does Not Move

Besides time-value decay, another risk of waiting is that the stock price could fall (i.e., negative delta) between now and next Monday. A call option’s value declines in tandem with the underlying stock price by a certain proportion called delta. The delta of the Chevron September $105 call is currently 0.34, which means that for every $1.00 move in Chevron stock, the call option moves $0.34. So if Chevron were to drop 0.5 percent between now and next Monday–about $0.50–the September $105 call would drop in value by $0.17 ($0.50*0.34), which is more than eight times the cost of buying back the June $110 call for $0.02 prior to expiration. 

Of course, Chevron’s stock price could also rise between now and next Monday, which would make the September $110 call more valuable, so one could actually benefit from waiting. Consequently, I’m not saying that rolling now is guaranteed to get you a better price than waiting until next Monday. All I’m saying is that we can reduce risk by rolling now and getting a certain income amount that is substantial. Trading involves uncertainty and I am a risk-averse trader who agrees with the old proverb:

A bird in the hand is worth two in the bush.