A common question is where and to what strike to roll to if the stock has made a move north in a calendar spread. The deciding factor on which strike is, which one makes the most $$. To consider---
If you can roll to the same strike you get more return. But I don't want the stock to run away from me, so it is kind of a guess on where to roll to. If the stock is generating more and more up pressure i will go to the next strike and maybe out a week or month?
It is important to remember that rolling up for a stock that has moved up even if a neutral roll, is not all bad as you get the new intrinsic value.
EX; you have sold the 25 strike and the stock has moved to 27. To buy-to-close the 25 might cost you 2.10 and the next month’s 27.50 sells for 1.50. On paper you have lost .60 to roll up and out. But remember that you now have gained 2 of intrinsic value and also the bought call has gone up in price..(there will come a day when you want to sell that one)
So on paper two things have happened.
1. you lost .60 on each contract
2. you have gained 2 of intrinsic val in the sold one.
The one danger is that all of a sudden the stock drops back to 25 and then the .60 you lost is really lost..lol That is why it is a balancing act of when to roll and how far. Intuition, experience and gut feeling is the answer. Oh yeah a crystal ball helps.
55 comments:
Send 1 (one) crystal ball please.
I'm ready for the chapter on calendar spreads! I feel like a trading-hero--made money on my first spread. Thanks Jerry!
If any are interested in a Vert put spread, take a look at AAPL for next week. Trading around 390 you can sell the 365 and buy the 360 and net over .12 cents. That is better than 2% a week. Of course if the mkt or aapl is down then either roll down those strikes or disregard all together.
XOM pays .47 dividend on Friday. Am I correct in thinking that as long as the time value of my short 80 options remains above .47 I probably won't get assigned?
ihaveo's, simple answer is yes but of course you should have at least a dime added to that for safety. and of course..you never know what the other side of the trade is thinking. So the more cushion the better.
ihaveoptions,
My understanding is that the dividend payout goes by the owner of the share on the Ex-Dividend date. eg. XOM x-div date was on 11/8. Owner of the shares can sell it on 11/9 and still get paid with the dividend on 12/9. So I don't think you will get assigned with your short ITM call. Just my opintion. In fact, I was assigned on 11/8 for XOM without knowing it was x-div date for XOM with my short ITM call. Hope it helps.
Trendy
Forgot to mention, if your ITM XOM expiration is on 12/9, then please go by Jerry's answer and dividend payout date on the 9th has no affect on the assignment. It means that you may get assigned with a few pennies left on the contract.
Trendy. So what happens when assigned? Did you then liquidate the long position? I don't have the money nor the interest in owning a bunch of Exxon.
Guess I got that backwards but wold still like to know what you did.
On Tuesday morning 11/9 I saw my account have 500 shares of XOM "Short" and my short option was gone. I thought that was a mistake so I called the broker and they said my XOM was assigned. Because I didn't own the shares so it was assigned to me as "Short". Also I was responsible for the dividend payout for someone exercised the option on 11/8.
The broker told me to pay attention for the dividend date with the ITM option. Because someone equipped with intelligence algorithm would take you away even with pennies of profits. It can be done by predefined algorithm with automatic trading.
Long story short, ended up I have to cover the short XOM that morning to reduce my margin requirement, paid the commission and dividend and re-shorted my option for the next higher strike price against my long call.
Hey guys, good day today, Trade question here, I own long calls that are 10% + in the money, normally I would sell and take profit but I sold calls against these which are also now in the money, both calls expire on Dec 16, So I'm thinking I wait till expiration day, and if the situation is the same the best thing to do would be exercise the long position, and see if the stock gets called, would this be the way to go?
to RMH
Like to have an update on your SPX trades for the past couple of weeks. You haven't posted recently. I have been trading weekly SPX put credit spreads with 100+ points of cushion and picking up .25. Nice little income stream and able to sleep nights. Getting my 1% per week. I'll take 52% ROI per year any day. Wonder what you have been trading. Recently did a 1095/1060 and am currently in an 1165/1140. Both for .25
Nicky
I never see the utility of excercising the options. To much in commissions. If you have a net profit, just close both positions. If not take the short option and roll up and out. You might have to go out to next month.
Even if it costs you on the short option, the long option should be profitable. IMHO. I would also concider waiting until the last minute to roll in order to squeeze as much time value out as possible. One possible problem with deep ITM options is they could get called at any time since there is usually very little time value.
They both expire next week, I don't believe I would be allowed to roll the short with the long expiring that would create a naked call, which I am not approved to sell.
I see TradeKing shows only a $9.95 fee for early exercise.
Sorry Nicky, my bad. I missed it that BOTH expire next week. I think your option is to close them both. Any other thoughts out there??
@Taxman, when do you open your SPX trades? How many contracts?
Nicky,
Agreed with Taxman since you can't sell naked call with your account.
Trendy
I just noticed in my ThinkorSwim quarterly magazine it states that if short options are less than 5 cents, they will allow you to buy back for FREE. No commission. Haven't had a chance to check it out yet :(. Every short option is in the money this week :(
@ska. I usually open them on Mon or Tue for that Fri. Usually trade 10 contracts with a 25 point spread. Have been doing this for about 5 weeks now after reading about RMH success. I used to trade 10 contracts with a 10 point spread, got a lot closer to the index and got burned during the Aug/Sept turmoil. I laid low for awhile, did some research and found Jerry. Did put on a trade the Wed before T-day for the following Fri, got .40 with 110 points of cushions. NICE. I usually trade put spreads because the pay is higher and the cushions better, although I do have a 1310/1335 position on for this Fri. I hope ALL the above resistance holds. RMH has been using this method successfully for 20+ weeks. Figured I'd give it a try. Will start to increase the # of contracts soon if the success holds.
Hi @taxman i have 1120/1095 spx, opened monday for 0.20.
Regards
RHM
I have a question for either RHM or Taxman regarding SPX spread. Is SPX option only available outside of US. I seem can't access to the SPX and its option symbol. Thanks in advance.
Trendy
@Trendy
The symbol for the S&P500 options IS "SPX". The spreads I use for example would be to short the Dec week 2 1150 and go long the week 2
1125 giving you a bull put credit spread of 1150/1125 for the 2nd week of Dec. Since they expire Fri, you may want to use the normal Dec cycle options which expire 12/16. Yes, these options are available in the US. Hope this helps.
Thanks Taxman, it does. On the schwab account, I have to type $SPX to the get the option chain. Now I will search the symbol for Tradestation. This strategy that you and RHM have been using sounds pretty good. I will probably try it myself.
Trendy
@amritsari - "short options are less than 5 cents, they will allow you to buy back for FREE. No commission"
Other brokers also let you do this.
Hi all, wow some great trades and Q & A's.
Taxman, You are really correct regading 1% a week, compounded that is around 67% ann ROI. Every now and then i find myself frowning at only a 1% trade. I have to reach up and slap myself bact to reality..lol
Nicky, when you open a trade with both sides having the same expiration date, the trade should be entered with the idea that both sides will be closed. Rolling or legging one side is risky and not thought to be a good trade?
Several questions always seem to come up. Not criticizing as they are one of the most common situations that arise with calendar spreads. Here goes with an attempt to help with this common ‘problem’.
‘With a Calendar spread, What to do if both side become ITM.’ That situation is good but it does bring on some different scenarios.
Assuming you still like the stock, rolling the sold call is ideal. The long side is making you money as one day you will want to sell that side. The question is which strike to roll to. I try to keep a space between the two strikes and the bigger space the better. So if a stock goes past both sides but just barely, I roll the sold call to the same strike for the next week. If the stock has gone way past my sold strike I might have to jump ahead (month) to get a higher strike. I avoid jumping to far out or two soon as the stock might make a turn around and you rolled out for no gain. I try to trade with stocks that offer strikes in 2.50 increments. This gives me more choices when rolling up and out. Often I will roll out to a strike that is still below the current stock price. An example of this is my current position in MCD. I have bought the 90’s and sold the Dec. 17 95. MCD has gone to around 98. So when the TV (time value) has nearly disappeared I will probably roll into the Jan 97.50. Even though below the current stock I still capture the increasing difference between the bought call and the new sold call. Assuming that MCD is still above both strikes in Jan of 2013, then this is 'money in the bank' to be returned to me at the closing of the complete position. If MCD hangs around the 98 mark then this Jan I will try to roll into the next week 97.50 again. If MCD goes up quite a bit more by Jan expiration then I might have to roll into Feb100 etc.
So the goal is to chase it but not to enthusiastically. Ideally the stock will end each period right between the two strikes and your decision is simple, but if the stock passes both side it is not all bad! Just more complicated.
@ Jerry
Great advice and commentary. The days of my trying for 3-5% per week are over, thanks to RHM. Tired of getting burned being that close to the index along with this volatility. I'll take 1% a week forever.
Thanks for the replys Jerry and all, the stock which I was referring to in the post above is LYB, I bought the Dec $35 call in Sept. my intention was just to buy it and have it go up and then sell it, then I started reading about call spreads here and thought before I open a call spread for the first time, let me dip my feet in the water by selling calls against something I already own, so that's how I got started with this trade, there was a big dividend payout of $4+, which resulted in the call options being adjusted, so I went from owning the $35 to owning a $30.50 call, so I'm 30.50 long and 33.50 short it looks like the stock is retreating so I might be safe, I wait to next Friday to be safe, if the short is no longer in the money I will attempt to sell the long, hopefully I will be allowed to create a one day naked call this, if the system does not allow me to create a one day naked call I will just buy it back then sell the long, if the short is in the money I think profit wise the best option would be to exercise the long, then have the stock called for a $3 per share profit.
@Nicky
If both options are in the Dec cycle and the short 33.50 is ITM, then I would just sell both options next Fri as a spread. The long 30.50 should have a net intrinsic value of at least 3.00 which is the diff between the two strikes. Even if LYP is ABOVE the short 33.50, you should be able to close them both for the 3.00 profit. I can't figure out why you would want to exercise the long call.
To All, a possible new trade idea for those who may have funds in CD's or money markets paying nothing. Its called the "AAPL beat the Bank". You do the following, with AAPL, which is trading at 390.
Sell a bull put credit spread for Jan, Apr & July far enough away from AAPL current price to make you feel comfortable. As Jan expires, roll out for the next 9 months which should be Oct. I currently have the following spreads open.
Jan 295/285 for .70 for 7% roi
Apr 220/210 for .45 for 4.5 roi
July 220/210 for .80 for 8% roi
This strategy revolves around the possibility of AAPL dropping some 40-50% within the next 6-9 months.
ALMOST as safe as a CD. I currently have 10 contracts in each position and will roll out every three months. Annualize the roi's in conjunction with the safety. Just another possibility.
All - I forgot to roll my MSFT calls today. My account is an IRA so I can't hold short positions so for anyone that is wondering what will happen... I called the trading desk and they said that it will convert to a short position BUT since I can't hold one it will be liquidated immediately. Just FYI.
Taxman, interesting post about the "AAPL beat the Bank" trading strategy. I'm not a spread trader (I only sell naked puts-have been doing so for several years). But what you said makes a lot of sense. I'm going to look into and give some very serious consideration to your "AAPL beat the Bank" trading strategy. I just BTC my AAPL Dec 290 puts @ .01 and entered new Jan 310 puts @ 1.11 in my IRA account. When I'm able to BTC them for .01, I will look to implement your strategy on AAPL. One question for you: Do you BTC your short leg (in effect terminating your obligation and freeing up margin money ) when its value drops to .01, or do you just let both legs expire worthless?
For those of you who do diagonal spreads (referred to by many on this post as calendar spreads), I post the following from regular emails I get from a popular options broker (pay special attention to the last sentence):
"Next week is December expiration and I am going to monitor some stocks that are going ex-dividend (there are some big ones) like HPQ, DVN, CME, just to name a few. So take a look at your December short call positions to see if you could be at risk of early assignment. One quick trick is to look at the corresponding put and if it has .05 or less of premium then you could be at risk of early assignment."
dave g...what was your return for best and worst year,also how u managed trade during flash crash..thanks
What are people doing this week? I'm interested in naked puts and put spreads.
Thanks in advance for the ideas!
I just shorted GS Jan12 80 and 85 for $1.08 and $1.75, respectively. PE 15.7, ex-dividend Nov 2011, so should be smooth sailing. 52-week low of 54. I have $21 and $16 of cushion, respectively (trading at $101).
Am I missing something?
All - what is the best resource to look up when a stock is going ex-div ? Thanks in advance.
amritsari,
dividend.com would be a good source for ex-div info.
FYI AAPL beat the Bank. If anyone has been looking at the put spreads I mentioned in my post on the AAPL beat the Bank and are questioning the premiums I got on those 220/210 put spreads, let me say that they were placed on 11/28 when AAPL was trading at 370.63 and the VIX was higher. If interested adjust accordingly. I also waited for AAPL to swoon.
To ALL, like Dave, I am interested in trading naked puts. WHat stocks are being used and what is your strategy as far as using weeklies, front month, strike to stock price, expected ROI, expected premium. Anything you can add as to what your strategy is.
Doctorali, as I have stated before on this blog, I don't care about percentages (ROI). I have a set $$$ amount that I want to make each month and how I get there doesn't matter to me (as far as ROI is concerned). It's kind of like the late owner of the Raiders (Al Davis) who had a saying "just win baby win". He didn't care how they (his team) won (win ugly, not win ugly), just so long as they won. I have a spreadsheet where I keep track of every trade I make and I'm still considering adding columns for ROI, annualized ROI, and # of days in trade, but as of yet, I have not done so.
I looked back at my positions during the flash crash and all were winners except for a GOOG trade and I closed that one out for a pretty hefty loss. Looking back (with the benefit of hindsight), had I not closed out the position (for a loss) and allowed the stock to be put to me, I would have (in time) made thousands on that position in that stock. There would of been some short-term pain for sure, but as it played out, that would have been a big winner (being put the stock). Looking back at all my losing trades over the last two years (buying back short put positions for a loss), had I just allowed the stock to be put to me and played the "wheel-of-fortune", ALL (100% of them) would of been winners. Man, that really sucks to know that had I just allowed the natural course of events to take place and allow the stock to be put to me and play the wheel, I would have recovered all my losses and in many cases made a whole bunch more. So, my strategy has changed and evolved in part due to this blog and also from the experiences I've gained from trading this strategy.
To me, there's only two ways to shield yourself from a flash crash (looking at this from the perspective of a seller of puts). One is to just not trade (not an option for me...I'm going to trade). Two is cushion...naturally, "the more the better". There are three mechanisms by which one can get more cushion: 1. more volatility (most commonly recognized by a higher VIX), 2. simply select a lower strike (lower you go of course, the lower the premium), and 3. go further out in time. #1 is like the weather...we simply have no control over it. So, to gain more cushion, I have chosen a strategy based on a combination of #2 and #3 (keeping in mind that my main goal is not to be put the stock). But, as previously stated, my strategy has changed and I'm now no longer just selling puts as trading vehicles only (i.e. not willing to take possession of the stock and will buy back puts at a loss to prevent that). Now I'm going to "play the wheel" and if the stock is to be put to me...so be it. That is why, now, I only sell puts in stock that I'm willing to own and only at a strike price that I'm willing to buy it at. Since doing this strategy (longer dated puts and only on stocks I'm OK with owning), I have not been put any stock. I have and continue to have no stress in any of these trades. The only stress I get from my trades is in the weekly puts that I sell in SPX and AAPL...those give me stress, but my monthlies and bi-monthlies...no stress at all...only success!
Dave, I'm also looking at GS. I sold puts in them this month, nothing yet for JAN. JAN starts a new earnings season, so more than likely they will report earnings before the JAN puts expire. GS seems to be a company that always has bad headlines...if there is new news out about GS, it seems like it is always bad. They are currently selling at or below book, so the stock is very cheap. Your strikes are too high for me though. I'm looking more at the 60 strike for a .25 premium. If I can get .25 for a JAN 60 strike in GS, I will pull the trigger on that trade.
with the SPX selling strategy above, do dividends play a fact at all on out of the money puts. I think today is ex-div date.
for call sellers(like the coveredcall or calendar trades) are you guys closing out any sold calls before ex-dividend date ?
Hi dave G..so basically you are selling cash secured puts...
Doctorali, that is correct for my IRA account. All naked put trades have 100% margin money locked up for the duration of the trade. In my regular trading account (where I do most of my trades), the margin money is 1/10 of the notional value. So, for example, if I sell a monthly 300 strike put in AAPL, in my IRA account, my broker is going to reduce my BP (Buying Power - funds available for trading) by $30,000 (i.e. a 100% cash secured put or more commonly referred to as a "cash secured put"). By contrast, in my regular brokerage account, the margin money allocated for that same trade is only $3,000. All my trades are naked put trades, but, as I just stated, the margin money does differ (greatly) as to whether trading from a qualified or non-qualified account and thus so does my strategy for trading in each account.
Sold a vertical spread on the SPY 117/113 for a .15 credit. That 3.75% ROI.
@DMK, that's approximately 40 points cushion on S&P 500 for 2 days. Too aggressive for my taste. Good luck though!!!
To whom it may concern: SPY goes ex div Dec 16th. Pd .625 for the previous quarter.
Dave G,
You might consider using a put spread in your IRA. For instance, selling a 300/295 spread will use $500 in maintenance per contract ... as opposed to $30,000 for a cash-secured naked put. Of course, the premium is much less for the spread, so you'll need more contracts to get the same total premium as the naked put. But you will use less maintenance. A downside is greater commissions ... and the double bid/ask spread price you'll pay, especially if you buy-to-close prior to expiration.
Taxman,
I generally like selling monthly naked puts on solid companies, preferably trading above their moving averages. I don't like weeklies because you can't get as much cushion as you can with a monthly. January monthlies are 5+ weeks away and I would like to get 15%+ cushion and return 1%+ per week until expiration, or 5-10% ROI for the ones I'm opening now. Getting more cushion also gets you the lower 10% maintenance. If you use too close of a strike, then your maintenance (at TD Ameritrade) increases to 20%.
My largest positions are on Apple, Starbucks, and Mastercard.
Dave, i was curious why you do the cash secured puts on high prices stocks like you mentioned above doing the APPL Jan 310 puts @ 1.11 in your IRA account so you are tying up 30,000 to get about $100 which is such a low return. Am I missing something ?
The official SPX settlement for the DEC AM settled options is: 1225.05
Some have expressed a dislike for the AM settled SPX options (and I understand the reasoning why), but I love the AM settlement. It pretty much takes an entire days worth of trading and renders it mute. Once the opening bell sounds, you're pretty much off the hook, money is safe, and obligations are rendered void and null (technically you still have to wait for all 500 stocks to trade as least once, but that usually happens pretty quickly). As long as you leave enough cushion (I was short the 1040 strike this time--that's plenty of cushion), what happens the rest of the day doesn't matter.
Jim/Brian, I hear what you're saying. I have been selling puts for several years now...it's a strategy that I know very well and am very comfortable with. I have absolutely no interest in doing short-put spreads in my regular trading account as the margin requirements there are pretty reasonable for selling naked puts, but your point is well made for the IRA account. My current options level approval rating in my IRA account only allows me to do covered calls, sell cash-secured puts, and buy calls/puts (spread trading is not allowed). I called my broker this morning and they told me that they now will allow spread trading in IRA accounts. I applied for that approval rating today and if approved (I will find out on Monday), I will look to do some short-put spreads in addition to still selling puts (by far my favorite strategy). No, Brian, you're not missing anything. I will just say what I've said before; my goal is not to maximize ROI or to have any goal based on ROI. I've set dollar amounts that I'm trying to achieve in both my regular and IRA trading accounts and as long as I reach those targets, I don't care what the ROI is.
Sold MSFT Dec $26 calls, MSFT closed at $26!!! Talk about perfect scenario, keep the premium, sell calls again.
$26 on MSFT ok! $26.01 assigned? I wasn't sure so I chickened out and rolled to next week for net .22
I guess what I'm asking is can someone tell me what happens when a sold call closes a couple of cents in ITM?
For the wild gambler in me:
Going into what has got to be blowout revenues and earnings on approx 1/17/12:
prices as of close Fri
BTO AAPL 420 1/21/12 @ 2.55
STO AAPL 425 1/21/12 @ 1.99
net debit .56, max profit 5.00-.56=4.44/contract
52 week high $426.70 at Oct earnings
Not exactly within Jerry's guidelines but.....
"I guess what I'm asking is can someone tell me what happens when a sold call closes a couple of cents in ITM?"
---------------------------------
Hey ihaveoptions, I posted about this here, my sold call finished 3 cents in the money and nothing happened, it expired, there was no assignment, nothing.
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