Via special request, I’m delving into the nuts and bolts of the reverse roll repair strategy. It seems to work for any ticker but I tend to use it more often with SVXY with it’s unrelenting climb. I originally got this idea from some stuff Jeff was doing and also seeing Suz over at OMM use it as a low risk directional play on a stock.
Here we go….
My original trade was:
Sold 1 SVXY JAN 19 2018 120.0 Call @ 3.20
From the second I clicked the mouse button SVXY has pretty much gone straight up. This position is still out of the money but starting to take some heat. When the option gets near doubling the amount of premium I received I start looking at repair or adjust scenarios. Originally sold for 3.20 and currently going for 6.00 so getting close. So, what can I do? Well…lots of things:
1. Sit on my hands and hope
1a. Sit on my hands longer and hope for a black swan to fly by
2. Close for a small loss
3. Roll out and up (I like this choice too)
4. Reverse roll into 1 or more naked puts (I personally don’t add any contracts since I’m a big believer in position size control)
5. Reverse roll into a put spread (IMHO this is the safest)
**** on a side note, small position size it what allows me to make these adjustments. I’d rather have 50 single lots spread around among 50 tickers vs a single 50 lot on one ticker ****
For this example, I’m going to use choice number 5 on the list. You have to play with the numbers and decide what works best for you. I tend to look out about 3 or 4 months and try to sell something that’s around at the money. In this case, March 120/105 BuPS works but you could go more aggressive with the 130/115 for more credit. I’ll use the 120/105 in this example…
Buy to close Jan 120 call @ 6.00
Sell to open Mar 120/105 BuPS @ 6.70
Since the original call sale brought in 3.20 I’ll add that to the .70 credit for the roll for a new total premium of 3.90.
Ok…now what? How does this eventually play out on down the road? Glad you asked! Here’s some scenarios:
1. SVXY continues it’s relentless climb and our reversal goes on to be a glorious 3.90 winner.
Or: (worse case scenario which I ALWAYS look at)
2. We wake up the morning of March expiration and we’re standing in the middle of massive carnage with SVXY trading at 20 bucks. What do we do?
The spread is sitting at max loss of 11.10 (15 wide minus 3.90 received). Late in the day I’m going to sell to close the long 105 put at whatever it’s worth. I will let the short 120 put get exercised. When the dust settles my basis in the stock I received should be in the ballpark of 31 dollars. That is the current stock price plus the loss on the spread. No matter how low SVXY goes we should get the stock at a basis no worse than about 11 dollars above where it happens to be trading thanks to the spread (and if it goes to zero we’ve minimized the damage). We can then begin selling covered calls from a small hole instead of a deep crater.
Let’s say we would have chosen option 4 above in our repair choices. We could have bought the 120 call back at 6.00 and sold a March 85 put for 6.50. Net credit of 3.70 now on the 85 put. (3.20 original call sale plus .50 credit roll). Then we wake up in March with SVXY at 20 and we own stock at a basis of 81.30…ouch. A much much deeper hole to begin recovery than the 31 basis of the spread strategy.
Hopefully this fully explains my thinking on these. Any comments, critiques, or suggestions…feel free. I’m pretty thick skinned…LOL
Happy Turkey Day everyone!