An important part of my trading strategy is frequent evaluation of my current positions. It is only through examining “what IS” that allows me to prepare for “what MAY BE.” It is this forward thinking that prepares me for opportunity, thereby creating my “luck.” An example is in order.
I have a position in ISRG (Intuitive Surgical, Inc) that was entered on 4.16.10. Just my luck, I bought it way too high (long stock at $365.55.) My original trade was a short-term covered call, so I also sold the May 370 call at $13.00. The primary exit was for it to be called away in 35 days at a return of 4.95% ($1745.00.) This annualized to 51.62%, which more than meets my annual objective. The price didn’t move up as planned. Thankfully, due to my training from OptionsAnimal, I had a clear roadmap for adjustments and secondary exits.
Through the use of options and technical analysis I have been able to lower my cost basis from $352.55 (long stock debit – short call credit) to $299.90. The current position looks like this:
- 100 shares ISRG
- -1 Aug 300 short put
- -1 Aug 310 short call
- +1 Oct 320 long put Resulting Cost Basis => $299.90
Upon evaluating my current position I find that the stock price is trading near $340.00, the Aug 300 short put has less than $2.00 value left in it, the long put has $14.00 value left in it, and the short call value has increased from $20.50 to $31.00.
What does all of this mean?
There are 25 more days until August expiration. The stock is now trading about $30.00 above the strike of the short call, which means that the stock is likely going to be called away on August 21st. The stock must drop about 8.8% for the short call NOT to obligate me to sell my stock at 310. But, I never bought this stock with the intention of holding it long-term, so that’s an acceptable exit for me.
I can close the LP at this point and expect the trade to close August 21st. The credit for the LP of $14.00 would lower the CB to $285.90. An assignment of the stock via the SC would generate a profit of $2410.00, which is a 6.8% gain in 127 days (annualized to 19.6%.)
The long put protected me through the earnings event of last week and is no longer needed. However, if I close the put, my margin requirement will increase to cover 100 shares at 300, which is $30,000. This trade is in an IRA account and the short put obligates me to take an assignment should the price drop to or below 300 by August 21st. Having the cash to meet the margin needs is an important consideration! I can always close the SP by buying it back and adding that onto the CB for a small shave off the profit.
Another opportunity at this point is to roll the short put up and out. My original credit was $20.93 for this obligation and the current value is now less than $2.00. This means that I have realized nearly $19.00 credit on this options trade if I close it now. Or, I can look to roll it to a higher strike price in September for additional credit, which will further offset the debit of the long put.
What can I expect to get for such a roll? At the current stock price I could get a credit of $4.50.
This is where an understanding of options behavior and the Greeks comes in. (Again, thank you, OA!) ISRG has enjoyed three strong up days since it reported earnings last week. It traded as low as $306.81 and now is pushing against some resistance at $340.00. The RSI is curling into a neutral position, just above the 50 mark. The MACD is bumping up against the zero line which could act as further resistance. Trading volume has dropped off in the last two trading days, a sign of slowing momentum. All of this tells me that a pullback has an increasing probability of occurring in the next week or so. I know that I can get more credit for the roll if the price drops. Where would I expect a drop to find support? I see first support at $330 and then at $320. By analyzing the Greeks (delta, gamma, theta, and vega) I find that ISRG will need to drop between 3% and 5% to generate an extra $2.00 credit on a roll. Is this reasonable? A catalyst that would drop this stock price significantly is not expected for the next few weeks, but a consolidation or minor pullback would be healthy price action.
All of these considerations are involved in determining action points of managing the trade.
The process of position analysis is an important one in evaluating opportunities. By using all the tools you learn through your education at OptionsANIMAL, you will be able to plan your next moves and action points, enter GTC orders and be in position to “get lucky!”