Sitting on a Big Winner? How Rolling Call Options Locks In Gains

Sometimes the market gives you a problem, but it’s the kind of problem you want to have.

If you’ve grabbed hold of a winner and are sitting on big profits, you may be unsure what to do next. Do you take those gains off the table? Or do you hold on in anticipation of even bigger potential profits ahead?

The dilemma can lead to plenty of frustration – especially if you make the wrong call.

But the options strategy I’ll explain today can help you avoid some pain…

Recommended Links

Watch Jeff Brown and Larry Benedict Trade Their Own Money – On Camera

A Special Veterans Day Event: Wednesday, November 11, at 8 p.m. ET. For the first time ever, Silicon Valley insider Jeff Brown and hedge fund legend Larry Benedict are trading their own money on camera, using a brand-new kind of trade that costs less than $1. They call them “Penny Tech Trades.” And every attendee gets four of them free. The event is free, but availability is limited. RSVP "YES" with a single click here.

The Forgotten Ticker Critical to Elon Musk’s New $119 Billion Plan

This company once ruled American tech. Its stock fell, and Wall Street wrote it off. But Larry Benedict believes Elon Musk is about to turn it into one of the greatest U.S. comeback stories. Get the overlooked ticker now.

How Rolling a Call Option Works

If you’re bullish on a stock, the most obvious strategy is to buy the shares.

But you could buy a call option instead. A call option increases in value when the underlying stock rallies.

So a call option allows you to benefit from an upward move for just a fraction of the cost of buying the shares.

The downside is that time is constantly working against you. If the move you’d hoped for doesn’t pan out within your timeframe, you run the risk of your option expiring worthless.

But buying a call option can have a secondary benefit. That is, it can help you bank your profits and give you exposure to further upside.

It’s called a roll. Rolling means selling the call option you own to lock in profit, then buying a new one with a later expiration (and often a higher strike price).

So let’s see how it works. And then we’ll compare it to buying shares outright instead.

An Example Roll: Nvidia (NVDA)

Let’s look at AI chip juggernaut Nvidia (NVDA). (Please note that this is just a historical example and not a recommendation.)

Say you decided to buy a call option on NVDA in January 2024. NVDA kept rallying through to March, leaving you with a solid profit.

That’s where this simple roll strategy fits into the picture. Instead of risking those gains, you lock in those profits by selling your call option.

You then use a portion of those winnings to buy another call option with a later expiration and potentially a higher strike price. That lets you avoid missing out on any further upside (roll No. 1).

So let’s continue with the example. After a pullback into April, NVDA rallies again into June. But with NVDA retracing again, you become worried about giving back profits.

So you roll your option again (roll No. 2).

Nvidia (NVDA)

Source: eSignal

You sell your call option, locking in your second round of profits. You then buy yet another call option with a later expiration (and potentially a higher strike) to capture more upside.

This time, though, NVDA retraces and keeps falling, causing the call option to drop in value.

Remember, though, you’ve locked in two rounds of profit. And because options only cost a fraction of buying shares, you’re risking far less by buying that call option.

And you can close out the trade by selling the call option prior to expiration to recoup some of that amount.

What’s more, your risk from this trade is already known. It’s the amount you paid for the call option. In the end, you’re able to limit your risk, take profits along the way, and still have exposure to more upside using this roll strategy.

Compare that to buying shares instead…

Rolling Calls vs. Buying Shares

If you bought shares of NVDA, you’d have taken part in the rally all the way from January to June. But you’d make no profit until you sell the shares.

You’ve also tied up a lot more capital than buying options. Plus, if NVDA keeps falling, you run the risk of losing all of the money you could’ve made.

Now, to be fair, sometimes the roll strategy doesn’t work out. But the benefits of the strategy are clear. It lets you keep banking profits when you’re worried about a potential pullback.

And it also gives you the chance to participate in any further rally while also locking in your maximum loss.

Happy Trading,

Larry Benedict
Editor, Trading With Larry Benedict