Saturday, June 29, 2013
aapl mini-puts under pressure but cost basis is reduced.
because of the beating aapl took recently my aapl mini-calendar manufacturing biz experienced some pressure. previously, i had been rolling short mini-puts at the 435 strike every week for a credit. my records show that the previous calendar sale only reduced cost basis by 20 cents. prior to friday, june 28, my cost basis in the 30 aapl shares represented by the short puts had been eased down to 425.35 (including commissions.) that means if i had been exercised early i would own 30 shares of aapl for a net cost of 425.85 (the $15 exercise fee adds 50cents/share.)
because of the decline my short puts at the 435 strike due to expire on july 5 were in danger of an early exercise. the danger signs were that the delta on those options had reached -1 and the extrinsic value had declined to 1.5 cents.
the corrective action i took was to buy back the 435 puts and sell the jul 405 puts for a debit of 24.75. this relieves the pressure of early exercise, adjusts the short strike into a sweeter area for premium sales and reduces cost basis. this last bit is important to understand if you engage in these sorts of trades. i reduced the exercise price by $30 for a cost of $24.75 and the difference of $5.25 reduced my cost basis to $420.10. this came about because the jul 405 puts had about $5.25 of time-value. to be sure, my trade realized a loss $24.75/share but letting the options get exericised would have realized a larger loss of $29.32/share (=425.85-396.53) and now i can more quickly recover this smaller loss by further sales of near-the-money calendars. furthermore, aapl is now within sight of the july earnings date which tends to elevate premium and maybe price as well.
in any case, the cost basis keeps reducing!