For those 3 puts, are you hoping to buy more shares, collect the premium and not have to buy shares, or close the put for a profit, or something else?
The short answer is, it depends. I view many of my options as dynamic as my view can change with a variety of changing circumstances. Factors that affect my outlook on a particular options position include:
- the price of the underlying stock
- my overall position size in the underlying stock (incl options)
- premiums available in the options chain for the stock
- the timing of upcoming earnings announcements
- other possible catalysts for the stock
- recent trading range of the underlying stock
- my view of the valuation of the underlying stock
- my current cash position
- my near term cash needs
- my current allocation in the sector
- my view of current fear/greed in the market
- my overall short put options exposure: I calculate this using the worst case scenario that all my stocks on which I am short puts go zero
There are probably other factors but the list above is what I can think of right now. So I take all of these things into account. So the situation is different for each of those three positions. Note: that I also have other options positions on SWKS and SKX and on some other stocks.
So let’s look at the CRTO options as an example since I just traded some options today. CRTO is my 4th largest position at 9.2% of my portfolio. Note: this percentage is my long stock position only. My view of the stock is very positive and I have been increasing my position size by buying more shares in the recent past. I view the long term prospects as very positive. Specifically, I like the low PEG and the very rapid rise in earnings. I like that the business model is capital light so they can add a lot of revenue and earnings without much additional capital expenditures. I really like that they customer count has been increasing 8-10% per quarter sequentially and that their revenue per customer has been rising as well. I have becoming increasingly confident that by monitoring these two metrics I can detect early decline of or problems in their business. I like that earnings as growing despite their management saying that 2015 is a year of investing into the business; what a contrast to AIOCF! So given this view, I think a bull spread would be the appropriate trade. Ideally, I would do this by selling a deep-in-the-money put and selling a near-the money leap. I would try to match the premiums to roughly match the cost of the long call with the proceeds of the short put. I would look to buy a Jan2017 $55 call with a deep in the money put that expires sometime in 6-9 months. Ideally, the put would expire are 2 more quarters of earnings reporting on the stock so that I could have a chance of having the put expire worthless leaving me with the call for “free”. Fast forwarding to the time close to the put expiration, I would look to roll the put forward if the stock price is still below the put strike price thus enabling me to harvest some time value every month that the stock stays below the strike price. This is what I would do ideally, but, unfortunately, there were no leaps available on CRTO. At the time of my CRTO options trade, there no options beyond October 2015 available and I wasn’t confident enough in my short-to-midterm outlook to buy long calls. So I sold Oct15 $55 calls when the price was around $45. I received $12.80 in premium per share.
In the past several days CRTO has risen to close to the strike price ($55) so it’s gone up a bit faster than I expected. So I was now, I was sitting on this short put position with only time value left (i.e. no upside if the stock continues to rise). In addition, I still had 3 months of exposure to a market decline or a stock specific decline. To address these issues, I decided to do the following trade: I bought back the Oct15 $55 puts for $4.85 and sold the Aug15 $65 puts for $10.75 for a net credit of $5.90. Some might ask why I would trade a $10 difference in strike price for only a $5.90 credit. Wouldn’t I be getting shorted by $4.10? Sort of but not exactly. There will be one more earnings report before the August expiration. The new information that I got last night is that Google had a better than expected result in their ad business. This is good for CRTO and it bodes well for their 6/30/15 quarter result. Thus, I think there is a good chance that CRTO could go to $65 before August 21st. If it does, then this trade will net me an additional $5.90 compared to leaving my October put in place. The other benefit is that if the stock rises to $65 then I’ve also reduced my overall options exposure by $5500 per CRTO options contract in the period between Aug 21st and Oct 16th. Reducing my exposure reduces my risk or alternatively allows me to sell other puts of similar risk. Now, if CRTO does not reach $65 by August 21st then I will have 2 opportunities to roll the position forward. Right before August expiration I could buy back the Aug15 $65 puts and sell the Sep15 $65 puts; this would likely net me an additional $1.50 per share. If the stock is above $65 at September expiration then I’ve collected an addition $5.90 + $1.50 + reduced my exposition from the period between Sept and Oct. If it’s still below $65, then I can roll forward again to October, probably for another $1.50 net credit. In fact, I can keep doing this until the stock reaches $65, each time collecting an additional $1.50 or so.
Hope this helps.
Chris