NaughtyPines
Long

X -- COVERED CALL TO MITIGATE LOSS ON SHORT STRADDLE

NYSE:X   UNITED STATES STL CORP NEW
a year ago
Some time ago, I went X short straddle (Dec 18 11/11 short straddle) post-earnings, expecting volatility to collapse and to get out of the position at 25% max profit in fairly short order.

I still have a couple of weeks until expiration, but my hopes aren't high that price will retrace to 10 or 11 at this point, such that I will be able to get out of straddle at profit or, at this point, for scratch. Consequently, I'm going to close out the short straddle set up now at a $74 loss.

I am then going to strike while the iron is hot (price is low; volatility high) and move to set up a covered call in order to mitigate my loss on the short put side and hopefully to turn a net modest profit when all is said and done.

Here's the covered call setup:

100 Shares X
Jan 15 9 short call
7.39 debit
Max Profit: $161 (if called away at $9 per share)

If price is >$9 at expiry, my 100 shares are called away, and I'm out for $161 profit/contract (which will offset the loss incurred on the short straddle of $74 ... ).

If price is <$9 at expiry, I keep the credit for the short call, and continue to sell short calls against the position, further reducing my cost basis in the stock .
a year ago
Comment: So I originally did this as a covered call using the 9 short call, which I hastily rolled down to Feb 19th 8 short strike for an additional .54 credit. Regretting that decision given the fact that price quickly broke $8, I rolled the short call strike up and out to the July 15th 9 sort call, which was filled today for a .43 credit, further reducing my cost basis in my 100 shares. Of course, price back below $8 today, but I'm not going to putz with it further unless it rockets through $9 (my current cost basis in the 100 shares is $621, so I wouldn't mind being called away at $9 at this point). We'll just see how things go.
a year ago
Comment: Like my CNX covered call, this is working out nicely in the short term. My original intent was to just cover my short straddle loss of $74, but I think I'm going to hang onto it for a while and see how it goes. Price is at the edge of breaking my July 9 short call, but that is so far out in time that I can barely do anything with it ... .
NaughtyPines
a year ago
Rolling the short call down to the Feb 19th 8 short call for an additional .54 credit, further reducing my cost basis in the underlying.
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NaughtyPines
a year ago
Unfortunately, I probably got a bit more aggressive than I should have with that first roll, as price has quickly broken $8, the price of my short call strike. Given the amount of buying power devoted to the trade, I'm more than willing to hang in there a bit longer than usual and am going to roll that Feb 19 8 short call out to the July 15th 9 short call for an additional .52 in credit.
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