Sept 24th 2009
Bought an ITM covered Call
· BTO 100 stock at 83.16
· STO SC Oct 75 at 10.10
Cost Basis: 73.06
Reward: 1.94 or 2.65 %
Made a major mistake. Earnings was on 9/25 and the position was not protected!
Sept 25th 2009
Earnings disappointed and price dropped 17% to around 69.3
Steps taken:
1. Roll the SC down from Oct 75 to Dec 70
· BTC Oct 75 Call for 1.15
· STO Dec 70 Call for 5.9
New Cost basis: 73.06 +1.15 – 5.9 = 68.31
Note that the cost is already below the closing price after the drop.
Next decision was to buy a put to make it a collar. There was hesitation because of the IV, the price of put was expensive. Nevertheless, since there is a major change in the sentiment for this stock, a put was added
2. BTO Dec 65 Put for 2.92
Note the put is bought OTM. Trying to keep the CB low.
New Cost basis: 71.23
3. Cost average down by buying another ITM Covered Call
BTO 100 stock at 68.85
STO Oct 65 SC for 5.66
Cost basis: 63.19
Potential Reward: 1.53
( Similar cost reduction could be done with another BULL PUT or even call calendars if you are familiar with the trade )
Oct 14th 2009
RIMM stabilized and the SC expired. Booked profit from ITM CC = 1.47
New Cost Basis: 71.23 – 1.47= 69.76
Oct 30th 2009
Stock continued to go down.
November put running out of time. It was end of October
Decided to roll the PP out and down.
· STC Nov 65 put for 6.61
· BTO Dec 60 put for 5.21
New Cost Basis: 69.76 – 6.61 +5.21 = 68.36 ( Cost is reduced slightly from credit of rolling down the put )
Nov 6th 2009
It was a difficult decision. On one hand, RIMM seemed to have some support at 60. But on the other hand, looking at it, there could be a potential head and shoulder. If RIMM dropped below 60, it could go easily to <50.
Nevertheless, it was decided to remove the put and make it a covered call again. It could be a wrong decision but a put can always be added back if it drop.
· STC Nov 60 put on Nov 6 for 5.35
Also, roll the SC down from Dec 70 to Dec 60
· BTC Dec 70 SC for 1.08
· STO DEC 60 SC for 3.66
New Cost Basis: 68.36-5.35+1.08-3.66 = 60.43
Add another ITM Covered call to reduce cost
· BTO 100 shares of RIMM at 58.01
· STO Dec 50 SC for 9.54
· Cost Basis = 58.01 –9.54 = 48.47
Note that a bull put can be used also to reduce the cost. If a bull put is used, one needs to be ready to take the share and collar it the SP goes ITM and converts it into a collar
So if the stock remains above 60 on expiration, the profit for this trade is:
200 shares * (60-60.43 ) = -0.86
100 shares * ( 50 – 48.47) = 1.83
Thus there is still a small profit of 1.03 if stock stays above 60 by Dec option expiration.
Nov 13th 2009 - Concluding Remarks
Today, the stock is trading at 62.69. It has not turned bullish although there were rumours that MSFT may buy out the company. So there was a rally yesterday. There is strong resistance at 65 which is the last gap down.
The stock could easily goes back down, breaks support at 60 and go down to 50 just as I indicated with the longer term Head and Shoulder pattern above.
If that is the case, more adjustments will be needed.
The process is similar. The key is to keep a constant vigilance to protect your cost basis. Find the right opportunity to ride the trend up when it reaches support. For a fundamentally sound stock like RIMM, it will get back again one day.
There are more aggressive plays to manage a collar like this. You can sell the puts when the stock goes down and convert to shares to average down without adding cost. Be sure to add a new protective put for the new total number of shares. You can buy more shares at the perceived bottom and add PP. But these are more risky moves as you may be catching a falling knife.
My preferred way is to manage and close it breakeven or with a slight profit. After that, I will enter a new trade if the conditions are right
Meanwhile, keep managing and hope to spot the right opportunity to ride it back up again. While doing so, ensure that cost is under control.
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