This post might be a little difficult to follow if you are a Grasshopper. Or if you haven’t been following “Main Street beats Wall Street” closely. You might want to read my page on Rolling which is under “Educational” in the side bar. Rolling is an adjustment trade strategy traders use when their trades don’t go exactly how they hoped.
I originally got into the trade series I’m writing about on 4/11/16, one month ago. I sold 50 Naked contracts of U.S. Steel to expire 4/22/16. The stock was around $16.25 and I sold the $17 Calls for a premium of $.80 ($4000). If you look at the candlestick chart for U.S. Steel on 4/11/16 you will see the next day, 4/12/16 the stock started to take off. The problem was, I never Covered my Call by buying the shares of stock. On 4/22/16, Expiration Day, U.S. Steel was up to $20. My contract says I have to deliver 5000 shares of stock at $17 and the stock is at $20. If I delivered at $20 I would lose $3, times the 5000 shares, $15,000. Being in this very bad situation, I did a Roll. If you read my page on Rolling you will see there are a few types of Rolls. I did a “Roll up & out.” This means I Rolled up my Strike Price and Rolled out my Expiration Date. What this entails is buying back the position I sold at a loss and selling another position with a higher Strike Price and a further out Expiration Date. This will bring in a bigger premium to cover the lose I have from buying my way out of the original option. When I did this I was no longer obligated to deliver the stock at $17. Let’s take a look at this with the order forms.
This is the sale of my original Naked Call Option
4/11/16 – Sell to Open 50 X 4/22/16 $17 C @ $.80 (+$4000)
With this option I brought in $4000 with an $.80 premium. On Expiration Day the stock was at $20 and the premium was at $2.75. To buy my way out it cost me $13,750. I was out of my original position and the obligation to deliver the stock at $17. Here’s the order to get out of my obligation:
Buying to Close my original position
4/22/16 – Buy to Close 50 X 4/22/16 $17 C @ $2.75 (-$13,750)
At this point I’m down $9,750. I cannot just take this lose lying down. So when I closed this position I opened another position with a “Roll up & out.” I moved my Strike Price to $18 and moved my Expiration Date to 6/17/16. I went with the $18 Strike while the stock is at $20 because I felt there would be a pull back and being $2 In-the-Money gave me a nice premium I needed to cover my loss. Also to get that nice premium I needed to move my Expiration Date out to June 17th. Not the best situation nor does it fit into my strategy but sometimes you have to bend to make it work. This new Naked Call had a premium of $2.90 ($14,500). Here’s the “Rolled up & out” position:
“Rolling up & out” my original position
4/22/16 – Sell to Open 50 6/17/16 $18 C @ $2.90 (+$14,500)
If I held this position until expiration and it expired worthless I would have ended up making a profit of $4,750. Today the market is down and so is U.S. Steel. With the June 17th $18 premium down to $.75 from $2.90 I bought my way out of this Rolled out position to end the trade series. I bought my way out for $.75 for a total of $3750. Here’s the order:
Buy my way out of the “Rolled up & out” position
5/12/16 – Buy to Close 50 6/17/16 $18 C @ $.75 (-$3750)
Let’s do the math and see how this Rolling maneuver worked for me. Get your calculator!
(+$4000) (-$13,750) (+$14,500) (-3750) = +$1000
This deal is over! If I didn’t know how to do a “Roll up & out” I would have ended the deal with a loss of $15,000. With the “Roll up & out”, which made the deal last a little longer than I wanted, one month, I have a $1000 profit. Trading is not always a smooth highway. You will hit many road hazards. If you are going to be in this game you must educate yourself on how to negotiate your way out of harms way. This trade series might seem a little complicated to make $1000 but knowing how to make adjustment trades saved me from losing $15,000 and actually making $1000.
This is a very important post! Learn how to Roll Out!
Steve
The Options Coach