I am not sure I understand the reasoning on selling such a deep ITM put. I know this board does not talk options much. Maybe you could bring your trade to SA Options to discuss. To acquire shares, I would sell shorter term put OTM usually, taking advantage of high CAGR on time decay. For income, I would sell ATM, maybe even farther out, with plans to roll.
Selling so far OTM short term, garners very little TV decay and very much mirrors buying the stock. I don’t see the advantage.
OK. Let me explain my reasoning, but before I do it is relevant to share my positions in SWKS as prior to this last trade as that information factors in to my reasoning.
*Shares: 12.3% of my portfolio
*Short puts: Apr 2 2015 $98 strike (equiv to ~2% of portfolio if assigned)
*Short puts: May 15 2015 $85 strike (equiv to ~4% of portfolio is assigned)
*Short puts: Aug 2015 $100 strike (equivalent to ~5% of portfolio if assigned)
*Long calls: Jan 2017 $95 strike (control shares equiv to ~5% of portfolio if they were shares)
Now, you can see that I already had a huge position in SWKS prior to yesterday’s trade. I would stand to lose ~23.3% of my portfolio if SWKS shares went to $0.
So here’s my reason for yesterday’s trade:
Like Saul, I believed that the 2 day drop to $90 was unwarranted and temporary. I believe that SWKS is still a great value given its past growth rate and market position/growth prospects. Earnings are due out in late April/early May. SWKS has guided $1.12 adj EPS. SWKS has beat earnings many times in the past and I believe it is likely they will beat. I believe it’s likely that they may raise guidance above what analysts are expecting. So my trade (Buy Jan17 $90 calls and sell May15 $110 puts) is based on my opinion that the shares may very well be above $110 by the May expiration date. It is also my opinion that SWKS will grow its earnings significantly in the coming quarters and that the stock price will need to reflect that growth. Also, May expiration is not that far away (about 7 weeks) so if I am correct about the price reaching $110 then I essentially get the long term calls for free. If I am not correct about my May target price then I will have several opportunities to keep rolling the puts forward (each time collecting more premium) until they expire worthless, leaving me with the call which has unlimited upside. So for this trad I was trying for more premium per share rather than trying to maximize time value decay.
Now if I didn’t already have such a large position in shares, I would have instead opted to buy more shares as Saul did. I realize that I am taking a large risk, particularly because I am now exposed to lose almost 30% of my portfolio if SWKS goes to zero. It certainly is possible for me to lose big on my SWKS position, but everything I see about the company, the future growth demand for their prodcuts, and the value of the stock price leads me to believe that the potential gains outweigh the risks. Yes, it is currently my highest conviction stock.
Here’s SWKS CEO on Cramer yesterday: