I'm trading mostly collars at this point: stock + (long) put + (short) call
and FYI, the put I get is usually 4-6 mo. out.
(Before y'all start... I know it's a conservative approach. It has
flaws. But it fits me right now.)
I'm tracking it with PowerOptions portfolio tools. Now one of the
strats suggested is to roll down the put (after a stock price decrease).
For example:
Stock bot @ 50
Oct Put BTO @ 55
Jun Call STO @ 50
when the stock goes to 45, PwrOpt suggests rolling the put down to 50
producing cash of $3.50
This will, in theory, lower the breakeven point for the trade. After
all, you have $3.50 already.
Now what I can't figure out is: why would I want $3.50 in exchange
for that $5.00 of (eventual) income in Oct.
I've asked PwrOpt but apparently they don't answer "why"
questions. Customer service is for "it's not working" type questions.
I understand that the Present Value in Oct. is worth less in today's
dollars, but $5 in 6 months at 6% annual interest is $4.85 PV.
That means that at $4.85 the deal is a break-even vs getting $5 in Oct.
I also understand that volatility, outlook for the stock, etc. is
factored in to the option price -- and I'm not counting that in for
my PV calcs.
and I can easily understand why the market maker will look to make
that deal at $3.50.
But why would anybody TAKE that deal? PwrOpt "suggests" it all the
time. Since they don't answer, I thought somebody here might have an
answer -- either I'm overlooking something, or they're crazy for suggesting it.
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