Friday, June 14, 2013
As frequent readers will recall, since the beginning of 2013 I’ve used the market’s bullish run as a way to do some roll-ups, buying to close in-the-money calls and selling new calls at higher strike prices. I’ve probably done this four or five times so far – I’ve been satisfied with those trades, which appear to trade my call premiums for stock gains, but I have been thinking that there must be a more efficient method than this to capture the stock gains.
I came across the term “unwind” as one approach. The transaction consists of buying to close and then selling the shares outright – meaning there is not a residual contract on the shares. You are free to reinvest profits immediately, and to perhaps increase the potential gains that you’re capturing from the stock rise.
My GE June position was in this status – the stock had appreciated above the strike price, and the delta had reached 1.00, so being called away was very likely. I also noticed that although there were two weeks left to options expiration, there wasn’t any time value left in the premium – it was solely the difference between the current share price and the option strike.
I did a what-if analysis, as shown in the chart below (the left hand side shows how I track all of the positions in Rescue My IRA). What I found was that by unwinding the position – buying to close and then selling the shares at market, my return was only $35 less than if I waited the remaining two weeks for the option to expire.
As long as I could get the money back to work in a trade that would net more than $35, I would be ahead. I found a new position and collected $160 in premiums, as a matter of fact – so I did better than I would have done by waiting it out.
So there’s a new tool in the tool kit. I’ll be keeping an eye on all of my in-the-money positions for opportunities to unwind them in the future.