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March 17th, 2010 at 12:27 pm
Closing deals/Yodi – Here’s the problem: A lot of times you DON’T close early. It’s like you are a landlord and you rented your apartment to someone and now you think you can do better but they have a long-term lease – you are pretty much stuck. You can offer incentives to get them out early and give up the bird in the hand for what you think you have in the bush but most sensible real estate people just pick a price, collect the rents and wait paitently for the term of lease to expire. Every time you force an adjustment early you are spening money on spreads and fees and increasing your own risk of loss – clearly if you pursue that as your main strategy you will keep eating away at your profits and keep exposing yourself until, inevitably, the market flips down on you and you have catastrophic losses and then you will say "How can something so unfair have happened to me."
Don’t enter into a long-term play if you don’t intend to be in it for the long-term. We take these plays with conservative entries, looking to make a nice, safe 10-20% return – which, if you collect it every six months, turns $5,000 into $20,000 every 10 years. If that doesn’t fit your long-term investment strategy then I would suggest roulette or possibly craps to get a better return but the long-term plays are INVESTMENTS, not gambles and need to be treated as such.
You have the WMT Jan $50 calls at $7.15, now $8.45 and sold the June $55 calls for $1.12, now $2.12 and the June $52.50 puts for $1.38, now .77. Why did we enter the play? It was an artificial buy/write with a net entry of $4.65 on the $5 spread so our expectaions IN OUR BEST CASE was to be up .35 to the caller plus whatever extra premium remains on the calls in June. Our goal on this play was to make 10-20% and to set us up for a roll to more front-month premium in Aug – Jan 2012. The current net on the spread is $5.56, which is up 19% and you can just shut this trade down early and be happy because 20% is as good as it’s likely to get in June and if you can’t stand to wait for June – you’ll never make it the next 18 months! The fact that your leap is deep in the money and the fact that the VIX fell off a cliff and killed the short contracts makes this an early win.
To get more aggressive on this play without making a mess, you can pick up $1 by selling (as a roll) the Jan $50 puts (now $1.80) and the June $55 calls can be rolled up to the Sept $57.50 calls at $1.60 for a cost of .50 to add $2.50 in upside potential but those are adjustments you can make any time and preferably when your caller and putter don’t have $2 of premium, which is 25% of the value of your long that you are looking to sqander.