Friday, December 25, 2015

Rolling a Position

When the markets are closed that is the best time to do some analysis and look at your OPTIONS!

The case study in AAPL is represented by the risk graph below in Fig 1. The option expiry is Jan 08'.


Fig 1. AAPL Risk Graph

There are some things of note:

This position cannot lose money no matter what happens to the stock price between now an Jan 8'. 

If the price drops, to me that is great! If it really drops that is even greater! The hedges will be making money and I will be selling them taking profit and buying more stock and then re-hedging. Yes the position net P/L will probably lose a little more value, but as we have seen when the stock rebounds the P/L climbs dramatically.  I have written about this before in the updates and those of you following along know that its all about collecting more assets (AAPL shares).

What if the stock price suddenly rises? You know from my previous posts, that I don't believe this will happen and there are several overhead supply zones. However, the stock price can rise before hitting those zones or a perhaps a massive institutional buyer comes in and pushes the price. What do I then?

The position profit is capped by the short call and if it is left to expire on Jan 8', then stock is sold at that price and the maximum profit is realized -- at least $4700 or more.

Likewise the position loss is capped by the put at around +$3200.

But I want to have this position constantly on. I want to do is extend duration and allow room to capture more profit. This is the beauty of options!

By monitoring the time value left in the short call (remember it is really decaying now) I will look to roll up and out, and I want to do this for about even or a credit. I don't have any cash to pay up.

Is this possible? Yes it is. If one looks at the option chain, and further out expirations I look for a strike price that is at least 1pt higher. I might just have to adjust my expiration cycles. The further out in expiration cycles, the more time value there is to sell. 

In fact in the worst case, I would just roll over to the same strike and collect more premium. But I hate to do that, I want to try and get at least 1 more point in profit (representing +$769) and a little credit.

Remember, while I have some ideas of where the stock will turn due to supply and demand, these zones are only probabilities, even though they are good ones. Ultimately, where these supply and demand zones are placed is random.

The options are insurance against anything.

The stock price is a 108.19, -22pts from where I bought it. The position is profitable, though not much, just about +6.5%. Where is the SPY index this year?

That is the power of learning how to hedge stock.


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