[Rolling Down Call Leg of QQQQ Straddle/Simultaneously Selling Mar 39 Call (QQQOM) and Buying Mar 38 Call QQQCL)/Day Order/Limit Net Debit $0.60]
Dear Member,
I am always looking for ways to reduce risk. There is currently an opportunity to reduce my risk in the QQQQ 39 straddle where I own the Mar 39 Calls and the Mar 39 Puts. Since the stock (and market) has dropped fairly dramatically since I entered the straddle, my Mar 39 Puts have gained in value while the Calls have dropped. I now am placing an order to sell the Mar 39 Calls (QQQOM)1.20 x 1.30 I own and replace them by buying the Mar 38 Calls (QQQCL)1.70 x 1.80 for a net debit of 60 cents.
Let me explain why I am placing this trade. Assume I bought 10 contracts of my Mar 39 stradde, 10 Mar 39 calls and 10 Mar 39 puts. I paid $3.65 or a total of $3,650 (10 contracts x 100 shares x $3.65) plus commissions. If the stock closed exactly at 39 at expiration and I was still there, I would lose $3,650 plus the initial commission. Though it unlikely that the stock would close exactly at 39 on expiration, that is my real risk. Now, I am going to sell my Mar 39 calls for about $1.20 and buy the Mar 38 calls for about $1.80. Selling the Mar 39 calls will bring in about $1,200 (10 contracts x 100 shares x 1.20) and buying the Mar 38 calls will cost about $1,800 (10 contracts x 100 shares x 1.80). Thus, I'll be paying an additional $600 plus commissions to roll my calls down $1. What do I get for that? Now, no matter what happens, the least the straddle would be worth at expiratio is $1. So, I am adding 60 cents cost to my original $3.65 investment bringing my total investment to $4.25 ($4,250 in the case of 10 contracts), BUT THE RISK IS REDUCED SINCE THE STRADDLE CAN NOW BE WORTH NO LESS THAN $1 AT EXPIRATION. My risk is now $4,250 - $1,000 or $3,250 or a reduction of almost 11%! I still have theoretically essentially unlimited profit. One of the benefits of straddles is that they have limited risk with a theoretically unlimited profit.
DISCLOSURE: At the time of publication, I own the Mar 39 Puts and the Mar 39 Calls on QQQQ.
Sincerely,
Bill Kraft for
CutLoss, Inc.
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