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Ask Alan #160 – Comparing Protective Puts and Position Unwinding as Strike Moves Deep In-The-Money

Alan answers a question posed by Doug, who asks:

Alan,
What are your thoughts on the following: Purchased 100 shares of ALXN (Alexion Pharmaceuticals) on 3/15 at $135.18 and sold the $135 call expiring on 4/18 at $5.11. The stock is trading at $140.42 on 4/5 and considering buying a $135 put for $1.05 to protect against a drastic price decline. This seems better than closing the position now. I think adding the put is converting the trade to a collar? Your thoughts appreciated.
Doug

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It’s the 2nd Wednesday of the month. Time for another original episode of Ask Alan. AA#160, “ Comparing Protective Puts and Position Unwinding as Strike Moves Deep In-The-Money”

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About Alan Ellman

Alan Ellman loves options trading so much he has written four top selling books on the topic of selling covered calls, one about put-selling and a sixth book about long-term investing. Alan is a national speaker for The Money Show, The Stock Traders Expo and the American Association of Individual Investors. He also writes financial columns for both US and International publications along with his own award-winning blog.. He is a retired dentist, a personal fitness trainer, successful real estate investor, but he is known mostly for his practical and successful stock option strategies.

7 Responses to “Ask Alan #160 – Comparing Protective Puts and Position Unwinding as Strike Moves Deep In-The-Money”

  1. Alan Ellman July 10, 2019 5:18 pm #

    Premium members:

    This week’s 8-page report of top-performing ETFs and analysis of ALL Select Sector Components has been uploaded to your premium site. The report also lists Top-performing ETFs with Weekly options as well as the implied volatility of all eligible candidates.

    New members check out the video user guide located above the recent reports.

    For your convenience, here is the link to login to the premium site:

    https://www.thebluecollarinvestor.com/member/login.php

    NOT A PREMIUM MEMBER? Check out this link:

    https://www.thebluecollarinvestor.com/membership.shtml

    Alan and the BCI team

  2. Joanna July 11, 2019 2:09 pm #

    So, I finally bit the bullet and joined Premium membership. One of the things that has continued to stymy my covered call adventures is earnings season. It been troublesome for me to find stocks I like that are going to perform well. I figured I would try using the premium stock list for at least a month to see if it enhances my trading.
    Also, here is a current covered call I’m in which I think I’m going to unwind today.
    BOT 100 shares of TEAM on 6/25 for $125.11
    Sold the 19JUL19 130 CALL with a premium of 3.20
    Current mark is approximately $140
    If I wait until expiration, it will (should) expire in the money and I will have the following profit minus the assignment fee of $15:
    $809 – $15 = $794
    However, if I institute the mid contract unwind strategy (which won’t include any assignment fee), I will profit as follows:
    Current price appreciation profit = $1,530
    Current loss on the Call = $755
    Total profit = $775
    The only difference here is a measly $39. Big whoop.
    This decision to me is a no-brainer. It’s the mid-contract unwind, baby! Waiting until expiration day would be foolish for three reasons.
    1. Assignment fee.
    2. Price of stock could crater and I would see it all dashed before my eyes.
    3. It ties my moolah up for another 9 days when it could be making mo’ money for me!
    So, without further ado, I’m going to log into my TDAmeritrade account and get ‘er DONE.

    • Roni July 11, 2019 3:09 pm #

      Joanna,

      welcome to our comunity.

      You will certainly find many great stocks for covered call trades in the weekly stock screen.

      Also, congratulations for the great trade that you executed with TEAM.
      If you unwind today, you will be gaining aprox. 6% on your original investment in 16 days, which is fantastic.

      I wonder about your broker charging you $15.00.
      Schwab charges me aprox. $6.00.
      I suggest you talk to Ameritrade and make them go down.

      Cheers – Roni

    • Jay July 11, 2019 4:02 pm #

      Hey Joanna,

      I support Roni’s suggestion completely. Tastyworks is the best price structure out there at the moment and when I called my broker about it they matched their prices and dropped my fees on the spot. I am a high volume trader so I do not know if they would have done so otherwise. But it never hurts to call whoever you are dealing with and ask for better rates.

      TD Ameritrade is an expensive broker compared to their competition. – Jay

  3. Roni July 11, 2019 3:12 pm #

    Alan,

    #160 is one of the best “Ask Alan” videos I have watched. And I watch them all.

    Roni

    • Alan Ellman July 12, 2019 6:01 am #

      Thank you Roni. Your comment is a reminder to me that it is our members who provide me with the questions and ideas that have allowed me to produce these “Ask Alan” videos for over a decade and plan to do so for years to come.

      Alan

      • Roni July 13, 2019 4:50 pm #

        Alan,

        we all appreciate your effort.

        Roni

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