InvestorsObserver
Workshop
Jan. 11, 2017
Agenda
MEMBERS ONLY WORKSHOP, Wednesday January 11, noon ET
Options Strategy Insight


State of the markets –review and commentary
Best strategies for current market conditions
Strategy Focus

Diagonal Spreads: Navigating around ex-dividend dates
Insider Tip

Good ‘til canceled orders
Managing the trade


Exiting early with GTC orders
Using follow-on trades to keep a position going.
Q&A

You will have a chance to ask questions throughout the session + we will have a Q&A
time at the end of each workshop
Market Conditions
Diagonals and ex-Div dates
Things to check:
• Is your sold call in the money?
• No? No problem
• Yes? Keep going
• Is the dividend payment greater than the extrinsic value?
• No? No problem
• Yes? Take action!
• What are your options?
• Close the trade
• Roll the sold leg
Calculating Premiums
Extrinsic value is highest near the money, or the stock’s current
price.
•Out of the money, the option price is all extrinsic value.
•In the money, the option price is made up of intrinsic value and
extrinsic value.
$44.00:
•Intrinsic value: $44.10 - $44.00 = $0.10
•Extrinsic value in bid: $2.30-$0.10= $2.20
•Extrinsic value in ask: $2.50- $0.10 = $2.40
$42.00
•Intrinsic value: $44.10 - $42.00 = $2.10
•Extrinsic value in bid: $3.30 - $2.10 = $1.20
•Extrinsic value in ask: $3.60 - $2.10 = $1.50
$40.00
Intrinsic value: $44.10 - $40.00 = $4.10
Extrinsic value in bid: $4.60 - $4.10 = $0.50
Extrinsic value in ask: $5.10 - $4.10 = $1.00
One-month calls with underlying at $44.10
Closing the trade
• Can you get out for a decent profit?
• Are you covering commissions?
• Can you get out for more profit than if you were to be
assigned
• Assignment math: (Strike Width– net debit - dividend)
– fees
• Beware the market maker!
Rolling the sold leg
• Buy back the sold leg and sell a new one
• Frequently means lengthening the trade
• Vertical rolls are possible, but you’re usually going to have to
pay
• This is a chance to adjust your trade!
• Higher strike?
• Increases target profit
• Lower strike?
• More downside protection
Rolling the sold leg
• ED was going to go ex-dividend on a payment of $0.67 on May 16.
• On May 13, ED traded between $75.12 and $74.37, putting our sold call very close to the
money.
• The short call had about $0.40 in extrinsic value, putting the position at risk.
• Since the stock was down a bit since we opened our trade, the long leg had lost some
value, putting our credit to exit at no better than $9.75… Not enough to make this trade
worthwhile.
Rolling the sold leg
• Looking at the chart, the stock had failed just above $76 twice.
• This meant we didn’t have the confidence to raise the strike, or extend the trade by
very much.
• That left us looking at a new sold call in June, making the trade one-month longer.
• If you’re going to narrow your spread, you want to keep the net debit smaller than the
strike width… Not really an option in this case because we could only get about $2.50 for
the June $72.50
• We got $1.20 for the June $75 though, increasing our target by $0.80 and actually raising
our target annualized return.
Exiting Early
• If a stock goes up by a lot, you can frequently get out for close to the
target profit, particularly in diagonal spreads.
• Setting up Good ‘til Canceled orders can help you get our early,
raising your annualized returns.
• You want to set your order for something close to your target, but a
little less… 90% or so.
• Example CRUS:
Exiting Early
• Example CRUS:
• Original Target: 11.3% in 117 days (38.5% annualized)
• Actual profit: 9.63% in 85 days (41.4% annualized)
Managing through follow-ons
• If a sold call expires, you can sell another one, lowering the net
debit and keeping the trade going.
• An important consideration when lowering your strike price is that
you don’t want to lock in a loss…
• For covered calls: Keep your net debit lower than the sold strike.
• For diagonals: Keep the net-debit lower than the strike width.
Managing through follow-ons
Net Debit
$34.44
$34.38
$33.73
$33.68
$32.93