Bill,
I don't know Poweroptions, but there are lots of services that are poorly thought out and give careless advice. Unless you have a good history with this one, I would consider poweropting out.
That having been said, by rolling to a 50 put, you would still be covering your original cost of 50 and I'm guessing that's the logic behind it, since collars usually presume an ATM protective put. However, as you said, it doesn't seem to make much sense.
Lou
--- In ConservativeOptionStrategies@yahoogroups.com, Bill Placek <billplacek@...> wrote:
>
> 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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