Rolling Options Positions

Options Education: Rolling

The market has traded in an extremely tight range for the past three months, so many long call and put positions will be sitting at a loss at October Expiration. Stocks are just not moving, which is killer for owners of options. (This lack of market movement is why I have limited our call/put buying in the last two weeks)

If they still believe in their trade thesis, traders will sell their losing October positions this week, and roll into new call positions to give their trades more time to work.

Here are some examples from today and previous days:

Example 1: Buyer of 10,000 Alibaba (BABA) November 115 Calls for $1.60 – Stock at 105 (rolled from November 120 Calls)

This trader originally bought 10,000 November 120 Calls for $1.90. A week later, as the stock fell from 108 to 105, he sold the calls for a loss at $0.88. However, he bought November 115 Calls to give himself a better opportunity for his position to finish in the money.

Example 2: Buyer of 34,000 Wells Fargo (WFC) June 40 Puts for $1.48 – Stock at 45.30 (rolled from November 40 Puts)

This trader originally bought 31,000 November 40 Puts for $0.21 on October 10. Today, he sold those puts for a loss at $0.08. However, he is buying June 40 Puts so as to give himself more time to be right.

What’s different about these big hedge/pension funds and you and I, is that these firms have much more capital to trade. They take a loss on their position, and then reload again with even more capital. Personally, if I’m going to be wrong on a trade, I’ll be wrong once, but not throw more money at a trade that isn’t working.

Therefore, if I am rolling a position, I take the capital that I received from selling my calls out, and put the exact same capital in the new call position.


Bull Call Spread

A bull call spread is used when a rise in the price of the underlying asset is expected.

The strategy involves purchasing a call at a specific strike price while simultaneously selling a call at a higher strike price.

The maximum profit on the strategy is the difference between the strike price of the long and short option, minus the premium paid.

The maximum loss is the premium paid.

For example, the purchase of the XYZ 100/110 bull call spread entails buying XYZ 100 calls and selling XYZ 110 calls.

If you paid $1 for this spread, the most you can lose is the $1 paid if the stock closes below 100 on expiration.

The most you can make is $9 if the stock were to go to $110 or above.Bull Call Spread

So why would a trader buy a bull call spread instead of just buying a call if he is bullish?

Let’s take a look at the fictional trade in XYZ from above.

Let’s say the XYZ 100 call was trading for $2 and the XYZ 110 call is trading for $1.

If I only had $1,000 of capital that I wanted to allocate to a bullish position, I could only buy five of these XYZ 100 calls for $2 each. (5 x 200 = 1,000)

However, let’s say I bought the 100 call for $2 and sold the 110 call for $1. Now I could buy 10 of these bullish spreads as the sale of the 110 call has lowered my cost of the trade, or premium paid, to $100 per spread. (10 x 100 = 1,000)

The downside to a bull call spread is that the trader’s max profit is capped at the strike price that he sold, in this example the 110 strike.

The upside to a bull call spread is that the strategy is a way to get even greater market leverage as a trader is lowering the cost of initiating a bullish position.

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Selling Puts

Keep Calm and Sell More Insurance

Put-Write or Selling Naked Puts

A Put-Write strategy, also called “naked puts”, is used when a rise in the price of the underlying asset is expected, or a significant decline is not expected.

This strategy is often used by traders who are willing to enter a long stock position in a stock at a lower price than the stock is currently trading at.

This strategy is the sale of a put at a specific strike price with the potential for loss until the stock hits zero. The maximum profit on this trade is the amount of premium received. Think writing insurance against a big fall in the stock or index. Every month you collect a small premium.

If I were to sell a put, and the stock went below my put’s strike price, I would be assigned 100 shares per put I’ve sold, thus making me long 100 shares per put sold.

For example, if stock XYZ is trading at 110 and I’m willing to buy the stock at 100, I could sell the XYZ 100 strike put for $1.

Put Write Graph

If the stock were to close above 100 at expiration, I would collect a maximum profit of $1 per contract sold … or $100 per 1 contract.

If the stock were to close at 99 at expiration, I would break even and be long the stock.

If the stock were to go below 99, I would lose $100 per contract sold per point below 99.

As I said, this is a great strategy to collect yield in a stock that I would be willing to buy.

Take for instance Facebook (FB). With the stock trading at 70 today I might say to myself “I’m willing to buy FB for 65 a share.” Because of this, I could potentially sell the April 65 Puts for $1.75. If FB closed above 65 on the April expiration, I will simply collect my $175 per put sold.

However, if FB were to close at 64 on the April expiration, I would be assigned on my put, making me long 100 shares at 65 for every per put sold.

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Covered Calls and Buy-Writes

Covered Calls/Buy-Write

A Covered Call, also known as a Buy-Write, is a strategy in which the trader holds a long position in a stock and writes (sells) a call option on the same stock in an attempt to generate income.

For example, let’s say you own 100 shares of fictional stock XYZ, which is currently trading at 25. You then sell one XYZ November 26 Call (expiring 11/18/2016) for $1 for each of your 100 shares. That $1, is actually $100. Because you don’t have a position in the call until you execute this trade, this would be an order to “Sell to Open.”

Let’s take a look at a few scenarios for this trade:

  1. In this scenario, XYZ shares trade flat for the next month and the stock stays below the 26-strike price. The options you sold will expire worthless and you will have collected your full premium of $1 per share ($100). Thus you will have created a yield of 4% in one month’s time. I also refer to this in my daily emails as “Static Return.”
  2. In this scenario, XYZ shares fall to 24. The options you sold will expire worthless and you will have collected your full premium of $1 per share ($100). However, your 100 shares of XYZ will have lost $100 of value. Thus, you are breakeven on the trade. At this time, you could simply sell the next month’s calls against your stock position.
  3. In this scenario, XYZ shares fall to 23. The options you sold will expire worthless and you will have collected your full premium of $1 (or $100). However, your shares of XYZ will have lost $200 of value, so you would be down $100 on the trade. At this time, you could simply sell the next month’s calls against your stock or exit the entire position by selling your stock.

In this scenario, XYZ shares rise above 26. The owner of the 26 calls will exercise his right to buy the stock from you, leaving you with no position. However, you have collected your $1 (or $100) from your call and your stock position has appreciated another $100. You are up $200 on the trade and have created a yield of 8% in one month’s time. At this time, you can move on to another trade or buy the stock again and sell another call. I refer to this in my daily emails as “Covered Call Return (if assigned).”

This graph illustrates these scenarios:
Covered Calls and Buy-Writes Graph

I strongly encourage you to execute covered calls/buy-writes if you have significant holdings focused in just a couple of stocks as it lowers your risk and creates yield

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LinkedIn Takeover

Additional Trade Idea: LinkedIn (LNKD)

On June 10th LinkedIn (LNKD) agreed to be acquired by Microsoft (MSFT) for 196 per share.

Last week this news hit the market of‘s (CRM) interest in buying LNKD:

In one of the biggest deals this year, in mid-June Microsoft (MSFT) agreed to acquire LinkedIn (LNKD) for $196 per share in cash, or $26.2 billion. While (CRM) was previously reported to be a rival bidder, a new disclosure after the close Friday indicated that salesforce may have been willing to pay more.

The new disclosure showed that in an early July meeting, the LinkedIn Transactions Committee reviewed an e-mail sent from salesforce to Co-Founder and Chairman Reid Garrett Hoffman and CEO Jeff Weiner that indicated salesforce “would have bid much higher and made changes to the stock/cash components of its offers, but it was acting without communications from LinkedIn.”

After reviewing it, the LinkedIn Transactions Committee determined not to respond.

This bit of news is interesting, especially in combination with the recent unusual option activity in LNKD.

Since the deal was announced, a trader/traders have been aggressively buying LNKD August 200 Calls (exp. 8/19/2016). This trader has bought over 46,000 of these calls that will expire worthless if there is not another buyer, who is willing to pay more than 200, for LNKD.

Having paid approximately $0.45, this is a $2 million call position, that is very likely to expire worthless in just a couple weeks. Yet day after day, this trader keeps buying more and more calls, including 12,000 just yesterday.1217linkedin

Ariad Pharmaceuticals $ARIA

Additional Trade Idea: Ariad Pharmaceuticals (ARIA)

On Friday with the stock trading at 8.00, a trader bought over 12,000 Ariad Pharmaceuticals (ARIA) July 10 Calls for $0.20. This was an interesting trade, though because the calls were so cheap, it felt like a cheap shot to me, and I made a note of the bullish order flow.

Today, a trader has bought another 2,000 of these July 10 Calls, as well as 2,000 July 11 Calls. And even more intriguing to me is a purchase of 1,000 June 10 Calls for $0.35. While the June 10 Calls were only bought 1,000 times, this trader would need ARIA to rally above 10.35, from 8.60, in just two weeks, to break even. This raises a red flag for me.

This call activity may be tied to the American Society of Clinical Oncology (ASCO) event this Friday June 3 – Tuesday June 7, or an Analyst/Investor meeting on Monday, June 6th. Or, perhaps, this trader is simply trying to play the recent Biotech run up (like our XBI calls that are working well, with the ETF up another 2.5% today).


As I have said in the past, I very rarely trade these bio-tech events. In the blink of an eye ARIA, or virtually any other bio-tech with a drug announcement, can be up or down 10-50%. I don’t see any edge in trading these bio-tech stocks into events, and typically trade the ETF’s, like our XBI calls. However, if you do want to “take a shot”, the July 11 Calls for $0.35 seem “reasonable”.

Your guide to successful options trading,

Jacob Mintz

Unusual Options Trading – Holly Frontier (HFC)

Trade Idea: Holly Frontier (HFC)


I’m often asked how I choose my trades.

Today, I’d like to walk you through my logic on NOT recommending a trade in Holly Frontier (HFC)

Two weeks ago, Holly Frontier (HFC) sold off following earnings from 34.50 to 31, and continued to drift lower in the days that followed. Last Wednesday, one trader took the selloff as an opportunity to buy 8,000 June 30 Calls for $1.20. The trade has not worked because the stock continues to fall, making new lows at 27.50 today.

This afternoon, a trader bought 5,000 HFC January 35 Calls and sold 5,000 January 20 Puts (all expiring 2018). This is a bull risk reversal, considered one of the most bullish ways a trader can structure a trade. Why is this? The trader is willing to buy 500,000 shares at 20 if the stock falls below that level on expiration in January 2018. Also, he has the upside of owning 5,000 calls at the 35 strike.

This trading is certainly interesting to me. However, not nearly interesting enough for me to get into a trade for a couple of reasons:

1.    While extremely bullish, the bull risk reversal is targeting 2018–not a time horizon I’m willing to get involved with. I have always found it hard to follow extremely long dated positions because the traders could be simply “taking a shot” with a long-term time horizon.
2.    The trader who bought the 8,000 calls has not made a second or third buy into calls that expire in the coming weeks/months. I prefer to see repeated buys as a way of showing conviction in the trade.
3.    There are plenty of earnings winners that have held up much better during the market’s recent pullback.
4.    The stock has shown zero evidence of a bounce.

The traders may prove to be right with their trades, but I am much more interested in stocks that have beat on earnings, held up during the recent market weakness and have the repeated bullish options activity that signals high conviction.

Your guide to successful options trading,

Jacob Mintz