Monday, June 3, 2013

should i wait or should i roll ... slw?

earlier i shorted a jun put on slw at the $22 strike, collecting a 70 cent credit. time and price have conspired to reduce the value of that put to 20 cents for a 50 cent gain. so the question is should i wait for more time to elapse, reducing the value of this put further or buy it back and sell the july 22 put? the thinkorswim analyze tab can help with this decision:

slw roll analysis
in this analysis the red line shows the credit of the roll wrt the underlying's price at june expiration and the white line shows how this credit will vary with today's price movement. in this view, more negative values represent greater roll-credit. as time elapses the white line will merge with the red line. if the current price of slw holds level through expiration then time decay will worsen the roll-credit so i have elected to roll now. my cost of manufacture of this calendar is merely the commissions i pay to my broker to buy and sell the options or 3 cents, wrt the option price. i got filled at 33 for a net gain of 30cents.  if i were assigned today my cost of ownership of 100 shares of slw would be $21.17(=22 -.70 - .33 + .045 + .15) including commissions and assignment fee.

after this positive experience with slw i have also decided that a business this good should be expanded. to that end, i bought three jan14 puts at the $15 strike for 50 cents and sold 2 more july puts at the $22 strike. the effect of this is to convert my cash covered put trade into a wide diagonal. the $15 strike was chosen because that is about 2/3 of 22 and this keeps the buying power allocated to this trade level with the initial position. there are 6 monthly rolls between july and and january with which to amortize the 50 cents paid for the $15 strike puts which adds 9 cents to the cost of rolling for a total of 12 cents of manufacturing cost for these monthly calendars.

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