DiB,
Sorry for the delay getting back to this, but as it turns out I can give you a better answer based on recent MU action
I) Under what circumstances will you buy puts before Feb expiration? If the answer is "no, I'll wait to see if I'm called out", then assuming you're not called out, when exactly will you buy puts? Will it be after you sell Mar 35 or Apr 30 calls? or may be after that and when MU's price hits a certain point?
I would (and did, partly for this example) buy puts before Feb expiration if MU gets well above the FEB35 strike. In that territory, there is no possibility of the position improving prior to expiration, except to wring out the last few drops of time premium from those calls. So all you get for hanging on is risk of the stock dropping hard. One prudent thing to do is to unwind the position, buying back the calls and selling the stock, but the assumption here is that you want to hold on to the stock long term, so what else can you do? Except for a rather nice price (too nice to last I think) I see now on ISE, the best offer on the FEB35 calls is 3.10 with the stock at 37.80. Using those prices, unwinding would get me out with a receipt of 34.70 instead of the 35 I will get if eventually called out. I could, and did, lock in almost that much return buying a FEB35 put for .40; that assures me the position will be worth 34.60 at expiration, even if the bottom falls out of MU in the next few days. If MU does take a dive, I can buy back the FEB35 call at a profit. If not, I can roll it out to avoid being called out.
II) Please correct me if I misunderstood you...
I understood, that if you feel that MU will run up to 40 or already is around or above 40, then you will:
1) sell Mar 35 calls
2) buy Mar 40 puts
In my case, I will be content to be called out on Friday, which is why I bought the FEB35 put. Had I been committed to holding MU, I would have chosen something farther out, and probably with a somewhat lower strike, perhaps the MAR32.5 for 1.05 or the APR32.5 for 2.05. What you want to do is get the protective put when it is cheap, but not be losing a lot of time premium. You don't want to be losing that fast eroding short time premium month after month.
If I am not called out on Friday, then I go back to my original plan. If MU is still close to 35, and if the market looks like it can rebound I will sell a MAR35. unless the price difference for going to APR35 looks better. If MU or the market looks weak, I intend to sell MAR30 calls to hopefully take advantage of the (hopefully temporary) weakness. Those MAR30 calls will not have much time premium, so if I am wrong and MU goes back up, I will be in the same spot I was in today: no upside potential and risk of losing if there is a decline. If MU creeps or jumps up from near 35 to 40, I will be kicking myself for selling MAR30s instead of MAR35s having gained almost nothing from that rise. But I don't expect MU to get through 40 without a real battle, and there is a good chance it will come off of 40 back to 35 or even lower. Having run so far ITM, my MAR30 cc will not do much during the retrace either, but a strike 35 put for March or even April could make a nice profit on the decline as well as assuring that I will not give back my accumulated gains. A strike 40 put would be a more aggressive bear play, and might be preferred depending on market conditions at the time.
and if MU starts tanking, then you will:
1) sell Apr 30 calls
2) buy Apr 30 puts
I don't really want to be buying puts while a stock is tanking. If I were dead set against selling MU, I would be buying longer term puts now, but of course it can always happen that something falls down when you are not prepared. Assuming I sold the MAR30 calls for a big premium, and had no puts, I might just hope that MU will recover some day and take profits on the MAR30 when I think MU is turning, or roll down if it looks like it will break below 30. Had I sold the MAR35 I might jump on the MAR30 or APR30 puts in addition to rolling down to the 30 calls, which means using all of the time premium from the new set of calls to pay for the puts. The only profit would be from the strike 35 calls (and that would mean a greater loss on the stock itself), but then the position would be neutral until it bottoms out, and most of my accumulated profit would be preserved. One could be more aggressive and buy a higher strike put to create a bearish bias and try to profit from the further decline, but I'd have to have a compelling reason to think it was going a lot lower to pay up that much.
Dan |
