Rolling A Call Option with a Large Bid/Ask Spread

As a general rule of thumb, when the call premium on a written (sold) option declines to a point where I have realized or captured 80 to 90% of the time premium, I like to consider buying it back. If there are only a few days to expiration it may not be worth the cost of commissions to buy the call back, but if there are several weeks to expiration there may be an opportunity to roll the position and get more time premium rather than wait for several weeks to only get that last 10%.  Recently I had a different but related challenge of a wide bid/ask spread.

I wanted to buy back a call written in the past because the premium had dropped considerably, but the spread on the possible buy back was huge the quoted spread was $0.15/$1.50.  And to add insult to injury the Black Scholes value of the call option was $0.13.  One of the reasons for the wide spread in bid/ask price was the decline in the stock price, placing this strike price 10% out of the money (OTM). Strike prices more at the money (ATM) have narrower spreads because they are more heavily traded and quoted.

Actually what I wanted to do was buy back the existing call and roll it or sell another call with a much larger premium and increase my income. In The Blueprint this covered call option rolling process is called Income Method #2 (IM#2).  The call that I wanted to roll into was 10 points lower and only 2.5% OTM, but the bid/ask spread was $2.35/$2.80, which is still fairly wide.

The approach I took was to enter the roll like I was creating a spread.  I entered the trade to buy back the call and sell the lower strike price call all at the same time for a net credit of $2.10.  In this way I did not have to leg into the trade by buying back the old call wrote and then entering a separate order for the new call to write.  This trade took about 15 minutes to execute.

For members of Fusion subscription service who can see our trades as part of the service, this stock is FleetCor Technologies Inc. (FLT), which is selling for about $151 at the time of the trade.