Friday, July 6, 2012

Credit Put spreads with Short ITM calls $AAPL

8aug - now that all my short calls on aaple are rolled to sep to avoid any dividend capture games by the robots, i will update the strategy of combining new credit put spreads with an existing diagonal spread. with stock at 620, i Currently have:
long Jan2014 DITM calls
short Sep2012 610 calls - worth about $2400 each now

so at a glance you can see that the 610 short call has about $1400 in time value and also you have $2400 in downside hedge if the stock pulls back to below 610 at opex. remember the thesis on diagonals is that i will be holding the jan2014 call no matter is not for trading in and out. so the daily, weekly moves of the stock are irrelevant to the jan2014 ignore it. the 610short call is closer to the stock price than most times when i post this example but its still relevant. a new credit put spread for SEP will obviously be below the 610 level.. since i sell credit put spreads in the range of .50-1.00 credit that leaves me with a max loss potential of $4000-4500 on a 10lot...but now subtract the $2400 that the 610short call is worth and you halve your max loss risk...more than that if you have multiple short calls/diagonals. so consider that hedge when selecting strikes for credit put spreads,you might be able to get more premium since you have a hedge.

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6july-this situation comes up every few months with me. heres the situation with stock at 604ish, i have:

long Jan2014 DITM calls
short July2012 580calls --worth about $2800 now

i just rolled into the 580calls from a weekly yesterday. as you can see the short calls are ITM. i have $2800 of downside hedge if stock keeps dropping. remember that in my diagonal spreads the week to week movement of the underlying LEAP is irrelevant since i will be holding it regardless, so it gets ignored. just think of it as a naked short 580call. based on that you can now use the 580 strike level to shoot against to add some credit put spreads. meaning pick strikes at or below 580. the 565/570 credit put spreads are going for about .45 now... by selecting strikes at/below 580 , you now give yourself a hedge with that short call...a hedge of $2800.. if stock closes on opex below 565 and you do nothing you keep the $2800 from the short call and use that to offset any losses from the put spreads. depending on how many lots you sell you may even still have a profit. if you can line up a technical level with your credit put spread strikes thats a bonus.

Actions at opex:
1. stock above 580 .. short call will get rolled to next month (would do that even if credit put spreads did not get added) and credit put spreads expire at max profit
2. stock between 570-580... short call expires at max profit, new short call or ratio for next month, credit puts expire at max profit
3. stock below 565.. short call expires at max profit, new short call or ratio for next month, credit put spreads rolled down and out to next month...the gain on short call ($2800) helps pay for any roll to the next month.


  1. Great strategy I see mainly a win win. The small slightly disadvantage if it expire above 580. Hopefully the LEAP and the credit put spread expires worthless has enough premium to cover the call and still in positive territory but still can roll to next month for a bigger premium. Nice Mark. BTW that picture is very distracting.

  2. Can't focus away from the gif, I know there's some text on the page but, damn that ass overpowers everything else.