Dr. Alan Ellman | Oct 08, 2017 02:44AM ET
When selling cash-secured puts our position management skills include buying back the short puts under certain circumstances. These include situations when share price moves up or down dramatically. When share price declines below the breakeven, we start losing money. Our guideline is to buy back the sold put if share price declines by more than 3% below the strike. This article will focus in on scenarios when stock price gaps up. We will use Broadcom Limited (NASDAQ:AVGO), a stock frequently on our Premium Watch List .
AVGO from 5/22/2017 to 6/2/2017
On 5/22/2017 AVGO (Broadcom Limited) was trading at $238.00 and then gapped up to $254.00 on 6/2/2017.
Selling the $235.00 out-of-the-money put on 5/22/2017
AVGO: Put Calculations
The BCI Put Calculator shows us that we generate an initial 25-day return of 2.62% (38.25% annualized). The cash required to secure this put is $22,900.00 per contract
Charting the $235.00 put option from 5/22/2017 through 6/2/2017
Guidelines to buy back put options after stock price gap-up
We automatically buy back the short put when the premium value declines to 20% or less of the original sale price in the first half of the contract and 10% or less in the second half of the contract. In the case of AVGO, the decline was about 6% of the original option sale price of $6.00.
Benefit of closing
The reason it usually makes sense to close in this situation is because we now free up the $22,900.00 per contract which can be used to secure another put position in the same contract month. If we can generate more than $35.00 per contract, this will enhance our portfolio returns.
Market tone
Global stocks rose this week, with the MSCI All Country World Index hitting a record high. West Texas Intermediate crude oil slipped to $49.50 a barrel from $51.50 last Friday. Volatility, as measured by the Chicago Board Options Exchange Volatility Index (VIX), closed at a record on Thursday and traded at 9.65. This week’s economic and international news of importance:
THE WEEK AHEAD
Mon Oct 9th
Tue Oct 10th
Wed Oct 11th
Thu Oct 12th
Fri Oct 13th
For the week, the S&P 500 rose by 1.19% for a year-to-date return of 13.87%
Summary
IBD: Market in confirmed uptrend
GMI : 6/6- Buy signal since market close of August 31, 2017
BCI: I am currently favoring in-the-money strikes 2-to-1.
WHAT THE BROAD MARKET INDICATORS (S&P 500 AND VIX) ARE TELLING US
The 6-month charts point to a slightly bullish outlook. In the past six months, the S&P 500 was up 10% while the CBOE Volatility Index (9.65) moved down by 30%.
Much success to all,
Original post
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.