Time To Roll
Time To Roll Hello Smart Option Sellers! I hope everyone enjoyed the holiday and day off yesterday. I appreciate all the nice notes that were sent my way. Thank you! But today it's back to business (unfortunately!) and we need to make an adjustment to one of our positions. We're going to make another "roll" to help us lower our risk and potential cost-basis. Alcoa (AA) We currently have a January 2019 put-sell position in AA that has fallen below the $28 strike price. AA stock is currently near $25.30 at the moment. Before implementing a roll trade, one of the questions that is needed to be asked is: if I were to be forced to buy the stock now and immediately be underwater on it, would I be ok holding it and just waiting for it to rally back? If we were to hold our AA put-sell through the January 2019 expiration and the stock stayed below $28, would we feel ok holding a small paper loss? Or what if the stock bounced back above $28 before the expiration allowing us to sidestep having to roll? These are the decisions that have to be made once the stock moves below the strike price. Considering the weakness we've been seeing, and with the possibility that it could continue, it makes sense at this time to employ the roll. Here's what we're going to do: Please read through all of these instructions before entering the trades. Buy back (buy-to-close) all of the AA January 18, 2019 $28 put options as a closing transaction (buy-to-close). And... Sell (sell-to-open) the AA July 19, 2019 $25 put options as an opening transaction (sell-to-open). You'll notice that I didn't put any prices on each option trade. Here's why: Currently, the January 2019 $28 put option is worth about $3.40 per contract. The July 2019 $25 put option is currently worth about $3.55 per contract. We want to make sure to sell the July put option for more than what we'll pay to buy back the January put option. This way, you'll come away with an overall small credit between the two trades. Here's how you will execute this two-part transaction: If you feel comfortable in doing this, and you can ask your broker for help, you can execute both trades in one single transaction called a "diagonal options spread". This way, you can specify a total credit between the two trades instead of having to manually execute two separate trades. Doing the spread trade is easier, but I also understand not everyone is knowledgeable, or even comfortable doing it, considering we haven't executed a trade like this yet. If you cannot (or don't want to) execute the spread trade, you can certainly execute two separate transactions. So, let's make sure we're all on the same page so there's no confusion. We want to buy-back (buy-to-close) the AA January 18, 2019 $28 put options and sell (sell-to-open) the AA July 19, 2019 $25 put options. At the moment, the July put option is more expensive than the January put option. That's good! Make sure that if you execute these two trades as a single spread trade, you enter it for a credit. As of now, the credit is roughly $.15 per spread credit, The higher the credit, the better. This means you will take in more money from the new put-sell versus what you pay to buy back the old put-sell position. Also, just know that prices are fluctuating, so by the time you enter your order, the spread may be slightly higher or lower than what I'm showing you here. The end game of implementing the roll today is that we will get an extra $3 per share of downside cushion versus the original position. So instead of possibly having to buy AA stock at $28 per share, we'd get to buy it at $25 per share. And remember, if you never had the original AA January 2019 $28 put-sell position, you DO NOT need to execute the roll trade, nor should you sell the July $25 puts as a new positions. That's all for now. Continue to hold all other open positions as-is. Contact me here with fills, comments, questions or concerns. Regards,
Lee Let's Grab That Cash!