Roll Results - Big Lots

Roll Results - Big Lots (BIG) Hello Smart Option Sellers! For those of you who had participated, we successfully executed our defensive roll trade yesterday on BIG. As noted in the last few alerts, BIG stock had fallen below the strike price, and with the general market continuing its own sell-off, we needed to take action to defend our position. When executing a roll trade, we substitute our current put-sell position for a different, more conservative put-sell position. This allows us to have more downside cushion, and lower our potential cost-basis if we are eventually assigned on the options. The roll also stretches out the trade to a longer-dated expiration date. This is fine, except now we expose ourselves to extra months of time, possibly allowing the stock to fall again. When selling options (puts or calls), the less time to expiration the better. But in certain cases (like our BIG trade), we need to take action that is the best overall choice at the time. And that is what we did (roll). Quite honestly, we were extremely close to the January expiration date which was just about six weeks away. I was hoping that we could've kept a low profile until then and have reached the 80% threshold to close out the trade. Who knows, BIG stock can certainly pop back above $32.50 in the next six weeks and the roll would've been all for naught. But on the other hand, everything could keep dropping, so we'd be happy we took defensive action. These are the types of decisions that come with the territory. Keeps us on our toes! We're also in somewhat of the same situation with our Alcoa (AA) January 2019 $28 put-sell position. At the moment, AA stock is meandering between $28-$29 per share. Let's see if we can squeak that one without having to roll, as well. Anyway, here's what we did with the BIG roll: Bought back (bought-to-close) all of the BIG January 18, 2019 $32.50 put options as a closing transaction (bought-to-close). And... Sold (sold-to-open) the BIG July 19, 2019 $30 put options as an opening transaction (sold-to-open). A majority of the trades went across the tape yesterday at a spread price of $.30 credit, so that's where we'll take the official mark. Whether you participated by executing the trades as a single diagonal spread, or by executing two separate transactions, everyone should have received roughly $.30 more per contract for the July sales than what was paid for the January buys. Most likely, you bought the January puts for $3.90 per contract and sold the July puts for $4.20 per contract. Everyone's specific fill prices were probably within the ballpark of the prices noted above, as those will be our official marks for the Track Record. To insure that everyone executed the trades properly, you should now see the new July 2019 $30 put-sales in your account, and the January $30 puts should be gone from your account. Here's how the current profit/loss numbers look: We've taken a locked in loss on the January $32.50 puts of $3.52 per contract ($3.90 - $.38 original sell-to-open price). But with the sale of the new July $30 puts of $4.20 per contract, we have the opportunity to book an overall gain between the two trades of $.68 per contract ($4.20 - $3.52) at July 2019 expiration if BIG stock remains above $30 per share. So at this point, we wait to see how it will all play out. We've now lowered our potential cost-basis by $2.50 per share by selling the $30 strike put options. It's better to potentially buy BIG at $30 instead of $32.50, yes? The hope now is that the overall market, and BIG itself, will start to move back up. Let see what happens. For anyone who didn't execute the trades yesterday, you can certainly do so today if you desire. Remember, this only applies if you had the original BIG January put-sell position. If you had no stake, you don't need to do anything. Let's hit a few questions that came in specifically on this trade: Q: I did the diagonal spread trade, first time I have done this with Interactive Brokers. The price executed at -.237. I think that means I did better than the .10 credit? A: Within IB, the price of -.237 most likely means you bought the January puts at $.237 cheaper than you sold the July puts. That's fine. It's the same thing as saying you sold the July puts for $.237 higher than what you paid for the January puts. Just double check your account to make sure you now have July put-sales and the January puts are gone. If so, then you did it right. Q: What type of spread? What is it called? I have 10 C also at $35.00 what would you recommend and 20C at $32.50. A: As noted in the alert, the spread is called a "diagonal spread". It allows you to buy/sell a specific option for a certain expiration date and buy/sell a specific option for a different expiration date. As far as your call options, I can't help with that as those are not official trades. Did you buy those call options? Q: Lee, I rolled the trade as you suggested and it brings up a thought since this is the first time doing this type of trade. Understanding this transaction kind of takes the fear out of it. Assuming BIG continues lower and our exposure of getting put the stock continues, would it not be possible to continue to roll the trade several times if need be in order to avoid the loss. I was able to get the .20 credit spread and if we could always find a credit spread to roll to then eventually we could sell out without taking our lumps? The stock will surely stabilize or bounce and stablize at some point. Am I missing something? A: Technically you are correct. We could continue to try and roll the trade if BIG keeps dropping, but at some point, is the stock really worth keeping? I mean, if it continues to drop, then there could be something fundamentally wrong with the company, and it may be better off jettisoning it from the account. On the other hand, if it continues to drop but you still like the company, you might as well just take the assignment and take ownership of the shares. You have to step in at some point and buy them. Honestly, trying to gauge the bottom of a stock can be tough to do, and continuous rolls could end up being quite tedious. In the end, your points are valid, and you could theoretically continue to roll if you have faith in the stock. Q: Obviously AA is getting close to our strike as well. Not afraid to own it at 28 and sell calls against the position if assigned, but the chart seems bad with all the trend lines broken. That said, the RSI shows it strongly oversold, so maybe we have a bounce back coming. Should we be playing some defense here too given the overall market direction? Will you be putting out an update on this position? A: Yes, we're keeping an eye on AA as I mentioned above. If any defensive action needs to be taken, I will surely alert everyone. That's all for now. Continue to hold all other open positions as-is. Contact me here with fills, comments, questions or concerns. Regards,