DiB,
A protective put can be a good idea with or without covered calls once a position is in the money, especially if you are in a stock that you think could make a big move, but you are uncertain which way it will go in the near future. For the price of a put, you can insure that you will not give back all your gains, and you can still profit from a continued rise. Buying an ITM put with underlying stock has the same profit potential as buying an OTM call and reserving the cash needed to exercise that call. In some accounts you can do the stock and put, but not buy the call. As a companion to a CC it is a bit more involved.
In the case of MU, I see it at a critical point around 35. If it can hold 35 through this market decline, I see it going to 40 and hitting massive resistance there. If it can't hold 35, a retest of 30 is highly probable, which is why I'm looking at strike 30 calls. The idea is, if I am wrong about the retrace to 30, then 40 is a likely turning area that could result in a big drop later, so I am willing to spend the time premium I get from the APR30 if MU proves it can get to 40. At that point, the call delta will be nearly 100%, so adding the put will create a net negative delta for the whole position that will take a little profit from the decline. If it never makes 40, I won't buy the put and will hopefully just get called out and keep the time premium from the call. If it runs above 40 after I buy the put, then I'm not going to profit from the run up, but at least I have not given back the gains I have made so far.
What I am really doing here is trying to protect against a drop I think will happen, either from the 35 level or the 40 level, and giving up much of the potential gain if it goes from 35 to 40. I could just sell the stock hoping to buy it back cheaper after whichever decline happens, but for people who don't want to sell their underlying stock even when they see a decline coming, this is a good alternative.
Dan |
