Monthly Cash Machine Newsletter, Thursday, 08/17/2006 11:12:07 PM ET
ROLL OUT SUGGESTIONS for MON & IFIN
by Steve Gail
HAVING TROUBLE PRINTING?
You have several options to roll the position out to SEPTEMBER with the MON and IFIN
OPTIONS: First, you can close out your AUGUST POSITION for what the MON AUG 45 CALL will close at tomorrow ( maximum would be $2.50 DEBIT ) if stock closes over $47.50 and you have to close out both sides for the MAXIMUM loss and end it there with a loss of $2.50 times 20 contracts
- OR -
Close out the position as above and do one of the following:
OPTIONS Roll directly out to a SEPTEMBER position by
Selling the Mon Sept 45 Call
Buyiing the Mon Sept 47.50 for a CREDIT of $1.40 - $1.60
RESULT: If Mon closes under $45 come the SEPTEMBER expiration your net loss is going to be reduced to $0.90 - $1.00 times 20 contracts
or if you believe the trend of the stock is neutral to positive, you can
go the opposite direction by going 20 contract and selling
Selling the MON SEPT 47.5 .Put
Buying the MON SEPT 45.5 Put for about a $1.00 NET CREDIT. In this case if the stock closes above $47.5 you keep the $1.00 and reduce the AUGUST lost by $1.00
down to $1.40 - $1.60 NET LOSS
or you can ROLL OUT AND DOUBLE the position to 40 contracts on either calls if you think the stock has out done its run, and wipe out the entire loss and have a $0.30 - $0.40 gain, IF THE STOCK CLOSES BELOW $45.
- OR -
If you think the stock is going to continue in the current uptrend you can DOUBLE the put position to 40 contract and do this with the put side above
Selling 40 of the MON SEPT 47.5 .Put
Buying 40 of the MON SEPT 45.5 Put
However, if the stock moves against you, you will have to move the position out again and if you don't double the position you face a compounding loss.
Double gets you back in the game, rolling just reduces the loss if you are right and give you a chance to roll again if you are wrong for a slight net premium.
The same thing can be done with the IFIN position
If you need to close out the IFIN 45 calls you can roll to the
Selling 10 IFIN SEPT 45
Buying 10 IFIN SEPT 47.5 for NET CREDIT of $0.75 and if IFIN closed below $45
on the SEPTEMBER expiration date you would have reduced your loss by $0.75 from the current $1.50 LOSS, down to $0.75. If you double the position and you are right, that means 20 contracts. You are at a break even if the stock closes under $45.
Just as MON. If you have to roll you can delay the big loss for a slight net debit premium everytime you roll, however if you DOUBLE the position and you are right you break even or make money depending on the premium. THE DOWNSIDE is if you don't get the expiration it will cost you a lot more to roll out...
BOTTOM LINE.you roll the same contracts and you can cut the loss in half at least, if the SEPT position expires, if you double you can usually break even. BUT when you double you don't have the margin of error that you do when you just reduce your loss
In addition remember the following from your Monthly Cash Machine Tutorial
Specific Exit/Adjustment Strategies
With bullish credit spreads, there are three common methods to exit or cover a losing position and the alternatives range from "legging-out" or "rolling" into a long-term spread to "shorting" the underlying issue. (Bearish spreads offer similar adjustment opportunities but with calls and long stock positions.) The first alternative is to simply close the position at a debit and register the loss. Or, you can use a popular exit technique among day-traders; covering (by shorting the stock) the sold option as the stock moves through the short strike. This is a great method for bailing out on an issue in which the trend or technical character has changed significantly due to news or events, but you must be prepared to repurchase the stock in the event of a recovery.
Another strategy is to attempt a "roll-out" of the spread for a small profit or at least a break-even exit. To roll-out of a credit spread (in the current expiration period), place an order to close the short option when the stock trades, and preferably closes, below technical support or a well-established trend line or moving average on heavy volume. There are certainly more precise signals that can be used but this simple technique is based on the probability that, once a reversal has occurred, the stock should continue to move in that direction. After the sold (short) option is repurchased, wait for the new trend to lose momentum and sell the long position to close the entire play. It is a difficult technique to perform when emotion enters the formula but it works well once you become experienced at it. The key to success is using the method at known support levels or after obvious reversal signals, otherwise you are simply speculating about the stock's next move.
Finally, there modified version of the "roll-out" that involves a transition to longer-term options. This approach works best when the price of the underlying issue is near the sold option strike, but has not endured a significant change in (technical) character. To initiate this strategy, the current spread is closed and a new spread is opened with lower strikes and/or a more-distant expiration, in the best possible combination that will achieve a credit in the trade. The most optimum adjustment would use the same strikes in the closest available month, so that you would be selling the highest relative premium without committing to a long-term position. Obviously, this outcome is not always possible, and I caution against using this technique on all but the most high quality (blue-chip portfolio) issues, as you can quickly run out of downside margin if the stock declines further.
One thought I would add concerning position adjustments (as opposed to position exits) is that in almost every case, the decision you make about a specific trade should be based on your analysis of the underlying issue and your forecast for its future movement. That assessment is then factored into the risk-reward outlook for the strategy and the specific position you are considering. Of course, that's a very subjective task and the best advice I have seen on the subject is: If conditions dictate that a new position in the issue is viable, based on the fundamental/technical indications, the size of the premium/credit, and your personal criteria regarding the profit/loss outlook, then it should be considered as a candidate along with any other potential plays currently being evaluated.
So this gives you alternatives to taking the loss. You can delay and potentially minimize the loss, or double the position and potentially break-even or make a little. For reporting purposes I will only show the closing out of the position for the loss. The roll out is a subjective decision that needs to be considered by examining your net capital and the margin requirement and the intent to reduce the loss of the previous month or trying to get the entire loss back to a break even. Like any investment , the greater the return the greater the risk