TRADE IDEA (IRA): HYG SEPT 20TH 82 SHORT PUT
Metrics:
Max Profit: $173/contract
Buying Power Effect (Cash Secured): $8026
Break Even: 80.26/share
Delta: 31.71
Theta: .67
Notes/Comments: Up to this point, I haven't posted many of my IRA trade ideas, primarily because they are way longer-dated setups than people are generally interested in, and I've also been an infrequent buyer of the underlyings that make up my portfolio -- a fairly mundane mix primarily made up of SPY, EFA, TLT, and IYR covered calls where setup management consists of looking at the short calls from time to time and rolling them out for duration, credit, and further cost basis reduction. It isn't very exciting, and I may not have to do much for weeks, if not months, in certain cases.
Naturally, this trade is not going to be attractive to everyone; you are, after all, going to be tying up $8k of buying power for a very long time with a return on capital of about 2.16% if you do nothing and the short put expires worthless. For me personally, I have idle cash sitting in the IRA earning virtually nothing, and I don't anticipate adding to my core positions in short order given my cost basis, where these underlyings are in the grand arc of time, and my proximity to retirement. Moreover, one of my basic IRA rules is not to undertake single name risk, so my basic options are (a) do nothing; or (b) stick something out there and get paid to wait for the price at which I want to acquire.
Here, I'm interested in acquiring HYG with its attractive 5.46% yield, but at a price discounted substantially over where it's currently trading; otherwise, I simply don't want the shares. I can either wait until price gets there or sell puts that will result in a cost basis at or below what I'd like to get in at if I'm assigned. Here, I'm opting for the latter ... .
Post fill, I'll periodically look to roll for duration and credit to reduce cost basis further.
Max Profit: $173/contract
Buying Power Effect (Cash Secured): $8026
Break Even: 80.26/share
Delta: 31.71
Theta: .67
Notes/Comments: Up to this point, I haven't posted many of my IRA trade ideas, primarily because they are way longer-dated setups than people are generally interested in, and I've also been an infrequent buyer of the underlyings that make up my portfolio -- a fairly mundane mix primarily made up of SPY, EFA, TLT, and IYR covered calls where setup management consists of looking at the short calls from time to time and rolling them out for duration, credit, and further cost basis reduction. It isn't very exciting, and I may not have to do much for weeks, if not months, in certain cases.
Naturally, this trade is not going to be attractive to everyone; you are, after all, going to be tying up $8k of buying power for a very long time with a return on capital of about 2.16% if you do nothing and the short put expires worthless. For me personally, I have idle cash sitting in the IRA earning virtually nothing, and I don't anticipate adding to my core positions in short order given my cost basis, where these underlyings are in the grand arc of time, and my proximity to retirement. Moreover, one of my basic IRA rules is not to undertake single name risk, so my basic options are (a) do nothing; or (b) stick something out there and get paid to wait for the price at which I want to acquire.
Here, I'm interested in acquiring HYG with its attractive 5.46% yield, but at a price discounted substantially over where it's currently trading; otherwise, I simply don't want the shares. I can either wait until price gets there or sell puts that will result in a cost basis at or below what I'd like to get in at if I'm assigned. Here, I'm opting for the latter ... .
Post fill, I'll periodically look to roll for duration and credit to reduce cost basis further.
Comment:
The other acquisition strategy is to sell shorter duration at the price you would want to acquire. For example, say I want to acquire SPY shares, but only at 15% discount from current price (~235.50/share). I would sell the April 18th 240 short put for .65 and then proceed to roll it out for duration and credit, particularly on weakness where the roll will naturally bring in more credit. In a scenario where I'm shooting to acquire, my primary emphasis is to reduce cost basis prior to taking assignment, rather than realizing a gain on the short put itself (although it's always nice if you can do both).
Comment:
Filed for a 1.70/contract credit; cost basis of 80.30.
Comment:
Rolled the Sept 82 to the Oct 82 for a realized gain of .44 ($44) and a .30 credit. Cost basis of 80 even with 1.56 of extrinsic in the short put.
Trade active:
Monthly Opex Cost Basis Reduction Roll: Rolled the Oct 82 to the Nov 82 for a realized gain of .18 ($18) and a .26 credit. Cost basis of 79.74 with 1.65 of extrinsic in the short put. Next roll will be at April opex.
Trade active:
Was looking to roll from Nov to Dec, but markets are wide that far out in time, so will just hand sit on the roll for now ... .
Trade active:
Markets remain wide in Nov/Dec, so will wait to roll another month with 1.15 of extrinsic left in the shortie ... .
Trade active:
Finally filled a roll ... from Nov to Jan as is for a realized gain of .83 ($83) and .42 credit. Was going to roll to Dec, but it didn't seem to paying enough. Cost basis of 79.32 if assigned on the 82 shorties with 1.26 of extrinsic in the 82's and delta/theta metrics of 25.62/.58. Back of the napkin math: I started this in Feb (4 months ago) and have collected 2.68 in credits so far, about .67/per month, which beats the monthly divvy payment of .38. Naturally, it won't necessarily continue to do that, particularly if price pulls away (in which credit collection will decrease).
Trade active:
Rolling on weakness "as is" to March for a realized gain of >50% max (the Jan 82's worth .58 at the mid here) and a .39 credit. 3.07 in credits collected; 1.00 extrinsic in the March 82's; delta/theta of 24.79/.62.
Trade closed manually:
Covering here for .28, 2.79 ($279) in profit. Will look to re-up in the New Year.
