Hi Tranzz,
Take a deep breath and here we go! This is going to be expensive up
front to plug up the profit leak!
FIRST! THE NEGATIVE PART:
1. If you do nothing at all you have potential loss of $500 on the
stock ($10.50 net cost basis) if they exercise @ 10 for the 10 May
CCs. Also, you will no doubt have a greater lost $ opportunity on the
VVUS stock price increase. NEVER WRITE CCs strike prices below your
net cost basis. Otherwise, you will be upside down and the stock
price is running away from you! So, how do you take this lemon and
make some lemonade real fast!
2. You will need to cover your CCs "at market" the 10 CCs after 10 AM
tomorrow. If you can watch it, then limit sell 1/16 to 1/8 of a point
of the market price. The VVUS May 10s are going for 2 5/16s to 2
7/16s. So, you may have to fork up as much as $2,437.50 to cover your
CCs. The value of the portfolio (margin) may allow you the room to
pay for the closing transaction for the CCs. You did not mention the
net cost for the 5 June 15 CALLs.
3. Since, you are covering the May 10s you will have to stay away
from them for at least 30 days from the date sold in order not to
trigger a wash sale! The cost of the CCs to cover I'm calculating at
$2.50 per share or $2,500. That $2.50 would then make your net cost
basis (nut) $10.50+2.50=$12.50.
DO NOT ENTER INTO A REPAIR SPREAD WITH THE MAY 10s!
4. Stock Repairs! VVUS price is moving fast. So, you may be able to
really pull this off, make a profit, and still keep the stock! Using
Doug's killer Excel spreadsheet
webbindustries.com to plot out this strategy:
You would call your broker and indicate you wish to do a credit
spread. I used the ask for this example. You are selling 20 CCs of
the May 15s and buying 10 CALLs of the May 12.5s for yourself. The
premies from the 20 CCs you sell will pay for the 10 calls you will
buy in this credit repair spread for a balance of $0 or close to it!
The other 10 CC calls out of 20 is covered by the 1,000 shares. You
won't mind selling your stock for $15/share right? :-)
Here is the math:
=================================================================
Stock Shares: 1000
Net Cost: $12.500
Total Net Cost: ($12,500.00)
Current Price: 11 1/2
Buy Calls: 10
Strike: $12.50 May
Ask: 1 3/8
Cost: ($1,375.00)
Write Calls: 20
Strike: 15 May
Bid: 11/16
Credit: $1,375.00
Entry
Credit/(Cost): $0.00 You basically pay nothing for the repair!
=================================================================
Here is the outcome! Gain
stock CCs Long Short Gains Net Gains
PRICE gain/loss $ gains Calls options Total
$10.00 ($2,500) ($1,375) $1,375 $0 ($2,500)
$10.50 ($2,000) ($1,375) $1,375 $0 ($2,000)
$11.00 ($1,500) ($1,375) $1,375 $0 ($1,500)
$11.50 ($1,000) ($1,375) $1,375 $0 ($1,000)
$12.00 ($500) ($1,375) $1,375 $0 ($500)
$12.50 $0 ($1,375) $1,375 $0 $0
$13.00 $500 ($875) $1,375 $500 $1,000
$13.50 $1,000 ($375) $1,375 $1,000 $2,000
$14.00 $1,500 $125 $1,375 $1,500 $3,000
$14.50 $2,000 $625 $1,375 $2,000 $4,000
$15.00 $2,500 $1,125 $1,375 $2,500 $5,000
You notice that the breakeven comes at the $12.50 mark! If you lower
the strike prices in the spread to sell the 12 1/2s and buy the 10s
you will have a better chance of making the repair work with a profit
in the spread. BUT, you may not be able to write off your taxes the
10 May 10 CALLs to cover. That is up to you! |
