Roll Results - AA
Roll Results - Alcoa (AA) Hello Smart Option Sellers! Well that was impressive. The Dow Industrials had its biggest one day gain ever yesterday - 1,086 points. That's quite a move. But as I alluded to on Monday, it was inevitable that a huge snap-back rally would happen. For the 27 years that I've been a chart reader, patterns like this have been somewhat easy to read. When markets reach an extreme, especially after multiple days in the same direction, whether it's up or down, there's an extremely high probability that it will snap back hard in the opposite direction. This not only relieves some of the pressure, but it reduces the stress anxiety and allows cooler heads to prevail. All of our put-sell stocks had great moves to the upside yesterday, putting downside pressure on the put-option prices. It felt good, right? You might be thinking, "well, did we need to roll?" Yes, because a one-day move certainly does not make for a new trend, but it definitely makes us feel a little better. We need to remain vigilant though because a lot of damage has been done over the last few weeks, and I don't think the bears are willing to give up that quickly. I'm sure we'll see some retracement back lower in the next few days. So, when we're put in a situation where we had to make a decision about rolling our trades, doing so on an up-move makes it that much easier. As noted in the last alert, AA stock had fallen below the strike price, so 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 even more. When selling options (puts or calls), the less time to expiration the better. But in certain cases (like BIG & AA), we needed to take action, and that's what we did (roll). Let's go over yesterday's results. Here's what we did: Bought back (bought-to-close) all of the AA January 18, 2019 $28 put options as a closing transaction (bought-to-close) And... Sold (sold-to-open) the AA July 19, 2019 $25 put options as an opening transaction (sold-to-open). With the big move higher yesterday, we were actually able to get better fill prices on the spread as the day wore on. This is because closer-to-expiration put options will fall in value faster than further-dated put option prices when stocks move higher. By the time the alert hit your email, the spread was already near $.30 credit, and at the end of the day, it finished near $.60 - $.65 credit. This jives with your fill price emails to me and the Time & Sales report throughout the day, so we'll take an average official spread fill price of $.50 credit. Whether you participated by executing the trades as a single diagonal spread, or by executing two separate transactions, everyone should have received roughly $.50 more per contract for the July sales than what was paid for the January buys. Once again, the later in the day you executed the trade, the better the fill prices. We'll take the official prices for the purchased January puts of $2.40 per contract and the sold July puts for $2.90 per contract. In the end, it doesn't matter what each contract traded at individually, as everyone's specific fill prices were probably within that ballpark, depending on when you entered the trade. To insure that everyone executed the trades properly, you should now see the new July 2019 $25 put-sales in your account, and the January $28 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 $28 puts of $2.12 per contract ($2.40 - $.28 original sell-to-open price). But with the sale of the new July $25 puts of $2.90 per contract, we have the opportunity to book an overall gain between the two trades of $.78 per contract ($2.90 - $2.12) at July 2019 expiration if AA stock remains above $25 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 $3 per share by selling the $25 strike put options. It's better to potentially buy AA at $25 instead of $28, yes? The hope now is that the overall market, and AA itself, will stop the slide and build upon yesterday's massive up-move. 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 AA January 2019 put-sell position. If you had no stake, you don't need to do anything. And for those of you who wish to do nothing and wait it out a bit more - you're more than welcome to do so. This is your account and trade it as you see fit. 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!