The debt ceiling raise in America seems to have sucked liquidity out of the markets. Most companies across the board were down 4-5% with all bust some of the most resilient ones ($brk.b) not being moved in the slightest.
That meant that my previous short 4x 100 strike 1.09 limit SPLK puts finished 9th July in-the-money and I was assigned 400 shares of SPLK 0.00%↑ at a final average price of $98.91 ($100-$1.09).
In essence, what I “lost” was a week of time and what I have gained is 400 shares of SPLK 0.00%↑ at below $100 average.
Now that I’m in the position of holding the 400 SPLK 0.00%↑ shares, that is my immediate and most dangerous exposure. Any number of things can tank my position and I’d be helpless to do anything about it.
That’s why on Monday, when markets open, I intend to sell deep in the money calls against my 400 shares.
If you take a look at the $55 strike, it last traded at $52.50. That means whoever it was who bought the call option would pay an effective $107.50 to take shares off of whoever sold the call option. In my position, that would represent an 8.6% yield if shares rose and it was called from me, or at worst, shares tank and I receive USD$21,000 ($52.50 x 400) to effectively de-risk my position even more, changing my average buy price from $98.91 to $46.41 effectively.
However, that opportunity has now moved past us. My hesitance to execute not know if the call option would end in the money or not meant I could not afford to take on the risk of selling a call when I didn’t have the shares.
Nevertheless, the idea is the same.
The same exact strike has now rebalanced to be selling at $43.30. This means if called, I will receive $55+$43.30 per share for a total of $98.30 per share. Considering I paid an average $98.91 per share, that would mean a $0.6*400 = $240USD loss.
Is that ideal?
Probably not. But let’s look at the full situation.
If I sell 4x calls at $55 strike with a $43.30 limit, whoever is buying those call options will likely only move to exercise the option if the shares proceed past that range.
There are 2 outcomes here.
Shares stay or move past $98.30. Shares get called from me. I take a slight $240 loss to re-spin the wheel and start selling cash-secured puts without owning the underlying.
Shares drop 5-10% over the next week as selling momentum continues from debt ceiling raises. The option expires worthless. I’m now holding shares worth maybe $89 or less. In the meantime, I’ve been compensated ($43.30 * 400 shares = $17,320) and I’ve effectively reduced my average buy price from $98.91 to $55.61. I’ll probably start re-selling next week’s deep in the money call options to get an even greater yield.
Of the 2 outcomes, I would really rather have (2) happen to me.
Well, what if I don’t like my options?
My other options are to go closer to the money if I feel the markets are somewhat neutral or even bullish - we’re looking at the $99, $98, $97.5 or $97 strikes.
All four offer straightforward enough risk/rewards
$97 strikes - limit of $3.10 at the bid means I get paid $97 + $3.10 per share for a total of $100.10 per share - a 1.2% per week return if the shares get called from me. $1,260 credit to me if shares stay neutral or goes down.
$97.5 strikes - limit of $2.85 at the bid means I get paid $97.5 + $2.85 per share for a total of $100.35 per share - a cool 1.46% per week if the shares get called from me. $1,140 credit to me if shares stay neutral or goes down.
$98 strikes - limit of $2.54 at the bid means I get paid $98 + $2.54 per share for a total of $100.54 per share - a 1.65% return for the week. $1,016 credit to me if shares stay neutral or goes down.
$99 strikes - limit of $2.05 at the bid means I get paid $99 + $2.05 per share for a total of $101.05 per share, a 2.16% return for the week if shares are called. $820 credit to me if shares stay neutral or goes down.
As you can see, each strike has a clear trade off. Slightly more credit if I decide to take the lower strike prices, but then also a slightly lower return per week if shares are called, OR, slightly higher credit in case share prices dip.
Here, the decision is simple. All things equal, I would prefer to get more credit by going with the $97.5 strike. If share prices rise, 1.46% a week annualized works out to a whopping 70.08% a year Cut that performance in half and you still have 35% a year.
That’s a killer year in anybody’s book. I’m not about to hanged for that.
My biggest risk here is sitting on SPLK 0.00%↑ shares and not generating some form of income with it while exposed to the complete downside. If and when share prices drop against me, I want more liquidity to buy shares. I want to have a cash cushion that lets me deploy even harder into the position.
If on Monday, I get to deploy deep in the money strikes with limits and strikes that add up to more than 0.25% return on 98.91 (essentially meaning a limit/strike combination of $99.15 and above) then I will execute it. If I can’t, I’ll just sell atm calls and call it a day.
Either way, there’s no real harm. I will update on 12th June, so join this telegram group if you wish to have more real time updates.