AAPL completed a triangular correction and begun to rally in early July. The Contracting Triangle is a very clear pattern and it is generally followed by a strong rally which should match the largest wave of the triangle (about 12 to 15 points). My expectation for the current rally is that AAPL will approach $52/share before any significant correction.
The BRCM is hardly as clear as AAPL. It may appear from the Elliott chart below that BRCM may go UP briefly and then decline to the high 30's.
The position I hold has been posted before. I have decided to reduce the cash requirements in that position, while keeping the delta neutral appearance to it. As we approach expiration, the short Aug 25 calls may be assigned. If that occurs, I will simply close the short BRCM and sell an equivalent number of Nov 42.5 long calls I have. If the stock declines strongly between now and friday, I may roll the calls to Sept. or simply exit the position, if I am happy with the profits.
It is important, when doing this kinds of trades, that one lose the fear to assigment. IF assigment occurs, one simply close the short stock at the market price and sell an equivalent portion of the stock. The resulting trade should not be too different from the original.
The AAPLE chart:
The BRCM chart:
4 comments:
accountholder said...
Juan; In regard to your plan regarding possible assignment of BCRM, I want to remind you of a bad experience I had one time. You were aware of it then, but may not recall the details. I found that the assignment and selling the equivalent long calls on these calendar spreads, to cover the short calls, lost the time advantage. For example, say the August calls were $2, and we're short them, but the Jan long calls are $4 because of the time advantage. Well, if you do a spread sell and buy to cover you end up with $2 for each contract but if you let them assign you lose those $2. That's what happened to me that time, using a different broker, however. You want to check with this broker to see if the same thing would happen and if it would, you should take care of covering before assignment to take that time premium.
Accountholder
This is why it is so important that you cover your short and then sell the long option.
What you must have done there was to EXERCISE your long calls to cover your ASSIGNED short position.
Lets say I have a long call on AAPL at current market price, 10 contracts to expire in January. This is near the money, so the value per share is $5 almost all time value. If I was to exercise that, I am giving up $5 of time value, and end up with the stock at 47.5, which I could have gotten in the open market. There is no assigment here, I just EXERCISE my right to BUY the stock at 47.5. This should be a flag for your broker, and a good one would have told you that this was a mistake on your part.
Now, lets say that you have 5 Aug. 47.5 calls on AAPL and the stock closes at $48 on friday. If you would not cover the short calls on friday, you end up with a short position at 47.5 ($0.50 loss). BUT if you covered on Friday, you could end up paying $0.55 to cover the short option. If you let the option be exercised by your broker automatically on Saturday, you end up on Monday with a short position of 500 shares at 47.5. All you need to do is to cover immediately and pay only $0.55. As you know, this position is on margin and should be covered during the course of the day on Monday. Buying back the stock is probably less commission intensive.
If you find yourself overextended on the long side wth your $47.5 Jan long calls, (remember, you have 10 long and 5 calls, now you have only the longs). You can then short 5 Sept. calls, which will certainly bring you more than $0.50/share (september options have good time value still). OR SELL (not excercise) 5 of your $47.5 Jan long calls. You would be selling those calls taking in time value.
In the case of BRCM, I have november 42.5 calls, and ITM 35 Aug calls. I expect to be assigned in the next few days, but I think BRCM may come down rapidly (in which case I am not likely to be assigned). I might end up with a large number of short BRCM shares on monday. SO I will cover my short. I can compensate the expense by selling some of my Nov. 42.5 calls OR sell September calls. NEVER by EXERCISING my JANUARY calls, because I would be giving up much time value.
I hope this is clear. Please comment if it is not.
Juan: It's probably my fault it's not clear. I was responding to your comment about BRCM in which you said not to be afraid of being assigned and that you might let it go to be assigned. In response to that, I said that I'd done that once, let the shorts go through the Friday of expiration, with your knowledge, and ended up having then to sell the long calls to deal with the assignment. So I lost the advantage of the difference in their price that was due to their time difference. It seems that you are saying in your response that one does need to COVER, to buy back those calls before the EOD on Friday expiration, or that they'll let you buy back the shorts on Saturday (which I didn't know) in order to avoid that problem. Can you let it go through EOD Friday expiration and not have to pay for the full cost of the shares or just pay to buy them back? Either way then you have to have the funds to either buy back the shares either EOD on Friday or on Sat if they let you go that far, or pay for the shares themselves. If so, one has to keep the money there to do that, yes? If one doesn't have the funds to do that, available on that day, the Friday of expiration, or the Saturday after, doesn't one still have to sell the long position to cover it and wouldn't one lose that premium advantage? It seems like one must sell the long position before the assignment in order to deal with this, because doing it after the assignment they just covered me with it and I lost the price difference. I didn't have the funds available to buy back the calls or to pay for the shares. Is there a way even when you're short that way, to sell the long calls on the following Monday, and keep that price difference, rather than to have them sell them to cover the assignment and lose the price difference, even if you don't have extra funds there to deal with the assignment? Thanks!
Sorry for the confusion. You should contact your broker to clarify what are their policies and what is expected of you regarding margin requirements. In the meantime, let me discuss what I understand about this issue, but pleas DO talk to your broker.
1. About the short. Let's say I have 50 AAPL Aug 40 calls short. The stock is currently at 47.5. The easiest thing is to roll over the short to Sept 40, but because these are so far ITM, the difference between Aug and Sept calls won't bring me much money. So here is how you can close that position:
a. Close the Aug calls by buying them back before the end of day on Friday. When I do that, I pay the commission on the purchase and a little left in premium. Why? because I want to avoid assigment, supposedly. Of course you'd have to have the cash to pay back for this contracts, or the broker would give you a margin call.
b. Let the shares execute automatically at expiration (this is really on Saturday, so the short shares show up in your account on monday, not friday. The sale of the shares will appear in your account as a credit. That is, you'll have an addition to your account of 5000x40=200000. You'll then have until the end of day on monday to give up that credit by buying the shares back. You DO have that money in your account, you just got it as a credit, but you have to give it up before close on monday. The transaction involves commission, but the what you are buying back is equivalent to buying back the calls on friday.
2. I would never recommend that you sell options naked. This is because the stock may go too far ITM and cost you a great deal to buy back. BUT if you trade like I do, you always have more long calls than shorts. In the example above, you would have 100 AAPL Nov 40 calls, for example. 50 of these 100 contracts protect you against the loss you just incurred in the short side (see above) when AAPL rallied to 47.5. When it comes monday, you simply SELL (do not exercise) those 50 Nov 40 calls. You end up with a balance of 50 Nov. contracts.
--- The big no-no here is to EXERCISE calls that are far before expiration because you would be giving away your time value. That is the main point I wanted to make.
--- Being assigned is NOT a dissaster, quite the contrary, if it happens to you well before expiration, your counterpart in the trade (whoever BOUGHT the calls from your) would be giving up time value.
--- What I am planning to do with BRCM is quite alright because I have long calls. And I could cover my shorts on monday.
--- I can also do a rollover NOT to 35 Sept calls, but to 42.5 Sept calls.
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