OPENING (IRA): INTC FEBRUARY 19TH 42.5 SHORT PUT
Updated
... for a .70/contract credit.
Notes: As with my BA trade (See Post Below), targeting some options highly liquid single name for premium selling. Here, it's the beaten-down Intel, with the short put lining up nicely below support. 30-day at 44.8%, expiry-specific at 41.6%. I generally like to sell premium in single name at >50% implied, but occasionally settle for less when there's nothing better "at the top of the board," so to speak.
One of my New Year's resolutions is to not be so lazy with these plays, so compared monied covered call setups with delta metrics similar to those of going naked short put, the advantages and/or disadvantages of going with a particular expiry over just defaulting to the monthly, and whether something like a long call vertical or long call diagonal would make any sense here. I used to do these comparison and contrasts much more often, but it takes some additional time, but thought I'd set out the basic process of deciding what setup to go with here, even though I'm probably not going to do that with each and every trade I take.
COVERED CALL VERSUS NAKED SHORT
The February 19th 42.5 covered call would have a max profit of .60 currently with a break even of 41.90; the 45 monied, 1.14, with a break even of 43.84. For contrast, the 42.5 naked has a 41.80 break even, so you get a smidge (.10) more out of going naked versus going with the 42.5 monied. The 45 monied, with a 2.6% ROC at max, has a better return, but a break even that is nearly $2 higher than both the 42.5 monied and the 42.5 short put, so the trade-off there is less room to be wrong and therefore a higher return on capital. Both of these types of plays, however, have high buying power requirements, particularly in a cash secured environment, with the cash secured naked short put costing 41.80 to put on, with its primary advantage being ease of trade of management.
CHOICE OF EXPIRY
The other thing I've tended to be lazy with is choice of expiry. Here, there may be an advantage to "shopping" for the highest implied expiry, which -- in this case -- isn't the February 19th monthly; it's the expiry nearest Intel's earnings announcement, which is the January 22nd weekly with an expiry-specific implied of 47.1%. To get any short put to line up nicely with that support around 44, you're going to have to sell something like the 17 delta 44, which is paying around .52 right now for 23 days' of "work." On an annualized basis, you're probably going to get more bang for your buck out of going with the January 22nd versus going with the February monthly, which is more than twice as long in duration. The January 22nd 44's ROC%-age is 1.12% at max; 17.8% annualized while the February 19th 42.5 is 1.67% ROC at max, 12.0% annualized. Again, however, the trade-off is less room to be wrong versus getting in and out of these plays rather quickly to maximize annualized return on capital.
LONG CALL VERTICAL/LONG CALL DIAGONAL
When working with smaller accounts, long call diagonals have been one of my favorite plays to go with when I can't or don't want to afford a covered call or a naked short put, but want to do something synthetically that mimics a covered call. Given where Intel is at currently, I think it would set up nicely for either a one-off long call vertical or diagonal. Here's a couple plays with similar delta metrics to going with a naked short put with a delta value of between 16 (2 x the expected move) and something more aggressive, like a 30 delta.
The first example is the February 19th 37.5/45 long call vertical with a delta metric of around 20. A 7 1/2 wide, it would cost around 6.55 to put on, with a max profit metric of .95 and a 44.05 break even with a 14.50% ROC at max -- a whopping 103.8% annualized. What's not to like? The primary disadvantage is that one generally doesn't "manage" one-off debit spreads -- they either work fantastically or you take them off for a loss (e.g., 2 x max profit). Naturally, you can go with something far less aggressive than a monied, but one of your goals here should be taking profits relatively quickly, churning in and out of plays to maximize return on capital, rather than sitting out endlessly in an underlying without locking realized gains in on a regular basis.
The second, a diagonal, where you buy a high delta, longer-dated back month call and sell a shorter duration call, working it like a covered call. My general preference is to go at least "skip month" in duration for the back month, so I'd probably buy the April 16th 37.5 (90 delta) and sell the February 19th 74 delta 45, yielding a net delta metric of around 18. As with the static long call vertical, it's a 7.5 wide, but going longer duration with the back month costs a little more. Here, the whole setup costs 6.78 to put on, with max profit being the difference between the width of the diagonal (7.5) and what it cost to put on (6.78) or .72, an ROC%-age of 10.6% at max, 75.9% annualized. The advantage here is that you have opportunities to roll the short call to reduce cost basis further and therefore increase your ROC, but have a timer of sorts when you will have to exit the play, win or lose, at April expiry.
Here, I'm taking the "ease of trade management" route,* but will consider doing more monied short call verticals and/or diagonals going forward, particularly in some of the smaller accounts I'm working.
* -- To be completely honest, I hit click and send and got a fill before doing this post, but may do a separate play in one of the smaller accounts I'm working.
Notes: As with my BA trade (See Post Below), targeting some options highly liquid single name for premium selling. Here, it's the beaten-down Intel, with the short put lining up nicely below support. 30-day at 44.8%, expiry-specific at 41.6%. I generally like to sell premium in single name at >50% implied, but occasionally settle for less when there's nothing better "at the top of the board," so to speak.
One of my New Year's resolutions is to not be so lazy with these plays, so compared monied covered call setups with delta metrics similar to those of going naked short put, the advantages and/or disadvantages of going with a particular expiry over just defaulting to the monthly, and whether something like a long call vertical or long call diagonal would make any sense here. I used to do these comparison and contrasts much more often, but it takes some additional time, but thought I'd set out the basic process of deciding what setup to go with here, even though I'm probably not going to do that with each and every trade I take.
COVERED CALL VERSUS NAKED SHORT
The February 19th 42.5 covered call would have a max profit of .60 currently with a break even of 41.90; the 45 monied, 1.14, with a break even of 43.84. For contrast, the 42.5 naked has a 41.80 break even, so you get a smidge (.10) more out of going naked versus going with the 42.5 monied. The 45 monied, with a 2.6% ROC at max, has a better return, but a break even that is nearly $2 higher than both the 42.5 monied and the 42.5 short put, so the trade-off there is less room to be wrong and therefore a higher return on capital. Both of these types of plays, however, have high buying power requirements, particularly in a cash secured environment, with the cash secured naked short put costing 41.80 to put on, with its primary advantage being ease of trade of management.
CHOICE OF EXPIRY
The other thing I've tended to be lazy with is choice of expiry. Here, there may be an advantage to "shopping" for the highest implied expiry, which -- in this case -- isn't the February 19th monthly; it's the expiry nearest Intel's earnings announcement, which is the January 22nd weekly with an expiry-specific implied of 47.1%. To get any short put to line up nicely with that support around 44, you're going to have to sell something like the 17 delta 44, which is paying around .52 right now for 23 days' of "work." On an annualized basis, you're probably going to get more bang for your buck out of going with the January 22nd versus going with the February monthly, which is more than twice as long in duration. The January 22nd 44's ROC%-age is 1.12% at max; 17.8% annualized while the February 19th 42.5 is 1.67% ROC at max, 12.0% annualized. Again, however, the trade-off is less room to be wrong versus getting in and out of these plays rather quickly to maximize annualized return on capital.
LONG CALL VERTICAL/LONG CALL DIAGONAL
When working with smaller accounts, long call diagonals have been one of my favorite plays to go with when I can't or don't want to afford a covered call or a naked short put, but want to do something synthetically that mimics a covered call. Given where Intel is at currently, I think it would set up nicely for either a one-off long call vertical or diagonal. Here's a couple plays with similar delta metrics to going with a naked short put with a delta value of between 16 (2 x the expected move) and something more aggressive, like a 30 delta.
The first example is the February 19th 37.5/45 long call vertical with a delta metric of around 20. A 7 1/2 wide, it would cost around 6.55 to put on, with a max profit metric of .95 and a 44.05 break even with a 14.50% ROC at max -- a whopping 103.8% annualized. What's not to like? The primary disadvantage is that one generally doesn't "manage" one-off debit spreads -- they either work fantastically or you take them off for a loss (e.g., 2 x max profit). Naturally, you can go with something far less aggressive than a monied, but one of your goals here should be taking profits relatively quickly, churning in and out of plays to maximize return on capital, rather than sitting out endlessly in an underlying without locking realized gains in on a regular basis.
The second, a diagonal, where you buy a high delta, longer-dated back month call and sell a shorter duration call, working it like a covered call. My general preference is to go at least "skip month" in duration for the back month, so I'd probably buy the April 16th 37.5 (90 delta) and sell the February 19th 74 delta 45, yielding a net delta metric of around 18. As with the static long call vertical, it's a 7.5 wide, but going longer duration with the back month costs a little more. Here, the whole setup costs 6.78 to put on, with max profit being the difference between the width of the diagonal (7.5) and what it cost to put on (6.78) or .72, an ROC%-age of 10.6% at max, 75.9% annualized. The advantage here is that you have opportunities to roll the short call to reduce cost basis further and therefore increase your ROC, but have a timer of sorts when you will have to exit the play, win or lose, at April expiry.
Here, I'm taking the "ease of trade management" route,* but will consider doing more monied short call verticals and/or diagonals going forward, particularly in some of the smaller accounts I'm working.
* -- To be completely honest, I hit click and send and got a fill before doing this post, but may do a separate play in one of the smaller accounts I'm working.
Trade closed manually
Out for .10/contract today with 36 days to go. .60 profit/contract; 1.44% ROC as a function of notion risk.
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