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Tales of a Technician: Harvesting Gains on Harley

April 27, 2016

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Tales of a Technician: Harvesting Gains on Harley

You’ve planted your seeds, toiled for months, and now your efforts are finally bearing fruit. The large, ripe, green kind. We’re talking greenbacks. Not Washingtons. Not even Jacksons. No, your months of effort have yielded Benjamins and they’re coming out your ears.

It’s harvest time, baby.

During a recent mentorship session (one brimming with enlightenment) we analyzed a calendar spread my client held on none other than Harley Davidson. The Hogster. The Hoggie-Hog. Rather than buying shares of HOG and selling covered calls, he purchased a long-term, in-the-money call option and was selling short-term call options against it for income generation. Let’s say he’s long the November 30 strike call currently worth $19.20.

Due to Harley’s relentless ride higher in recent months, his long call has moved deep in-the-money accumulating all sorts of intrinsic value in the process. On the one hand, he wants to continue selling covered calls against the November option to score some more income. On the other hand, the November option, now deep ITM, is bursting with Benjamins just waiting to be harvested.

‘Tis a dilemma I tell ye, a dilemma.

Here was my suggestion, one that applies anytime your long call has moved deep ITM and you want to maintain your exposure while capturing some of the gains: roll up.

Now, diligent readers of Tales of a Technician. Intelligent, wisdom-seekers that they are might recall we discussed the ol’ roll up recently. That particular missive spoke to rolling up short calls. Today we turn to the long call roll-up.

Currently, the November 30 call boasts $19.20 of value and carries a 100 delta. It is for all intents and purposes a perfect proxy for long stock. But, with a number of higher strike prices carrying a much lower price tag, but similar delta, it’s altogether unnecessary to own a call this deep ITM for the purpose of selling covered calls against it.

My suggestion was to sell the Nov 30 call thereby harvesting the $19.20 and replace it with a long Nov 37.50 call for $12.00. The adjustment allows you to remove $7.20 per share ($720 per contract) of value from the position. That means you have $7.20 less capital tied up in the trade. That means you have $7.20 less risk. And, since the Nov 37.50 call has a delta around 90 it will behave very similar to the Nov 30 call allowing you to continue shorting calls against it for the months ahead.

It’s a win-win.

The transaction for rolling up is to sell to close the Nov 30 call while buying to open the Nov 37.50. The roll will yield a net credit of $7.20.

That, my friends, is how a pro-farmer harvests.

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8 Replies to “Tales of a Technician: Harvesting Gains on Harley”

  1. Thomas Hammonds Thomas Hammonds says:

    Thanks Ty! I really enjoy your Tails of a Technician articles!!

  2. Avatar JoanNee says:

    Makes total sense! Thanks.

  3. Avatar ERICSIMMS says:

    Great analysis, many thanks, Ty.


    Thanks Tyler. It’s beginning to make sense.

  5. Nicholas Kingsbury Nicholas Kingsbury says:

    Thank you.

  6. Avatar JOHNRYAN says:

    Thanks Tyler! Great info.! Very beneficial!

  7. Great lesson Tyler. You will notice I roll up my long calls and puts quite often in the options report. Always looking for a profit lock. Also this is great for people who trade 1 or 2 contracts and want to take profit and stay in the trade.

  8. Avatar CYNTHIABLACKWELL says:

    Lovin’ it!

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