Well, first of all you've negated your upside profit. Now it becomes 30$ max plus or minus the difference in the prices of the options.
If you bought that 1280 @ $10 and you can Sell the 1250 for more than that, the variance in the Present Value of the 1280 and the Present value of the 1250 have to be judged. It's likely you would be happier taking the $$ on the 1280 rather than allow it's Premium value to decay with time.
On the other hand, Selling the 1290 once the Market dropped to your 1270 Price is likely to get you far more than selling the 1280 outright. And your play would be for a market rally knowing that your max downside is your original 10 dollars. Your maximum upside is for the market to close @/>1290 and then it would be the value of the 1290 less $10 less costs. Depending on when happened that you sold the 1290, the spread between the two should be at least 10 dollars as they would be both in the money. So by Selling the 1290 you recoup your original investment in the 1280. The extra Premium is your buffer against the possible 10 point loss in the event the Market Closed @/< 1280.
But in a scenario like that, you might as well just close out the original put, unless you are very confident the Market will rally into Expiration.
The other way, you are swapping out your Sigma. Selling the 1250 invites the possibility of the market rallying and you only make the difference between the two.
Say for sake of argument the 1250 is $20 when you sell it. The 1280 has to be in the 40s, roughly. Selling it for $40, you net $30 and that's the best you would do if the market got crushed anyway plus the $20 less costs.
I think if the 1250 was trading at $20, however, $40 for the 1280 would be a rather lowball number. I never was big on figuring out exactly what the value of an option "should" be, it's a science unto itself. I'm just throwing numbers out.
But if and when it happens, you have to judge "where" the options are and determine the best strategy. As a rule, I think the "best" strategy is normally to close out the single position and not try to get fancy. The "right" way to do it is to value several options and see if there is a disparity in your favor. But usually that does not happen.
Best Option trade I recall was clipping some guy who had to be asleep. MU was trading at 45 and he sold me 10 40 Calls at 2 bucks. When I saw he did not change his Offer I did it again. Only snuck away with 20, however. After that he moved off the Offer. I ended up shorting 2,000 at the 48 level twice before MU finally broke out. That was a pleasant day. |
