This morning on the gap down in KO I bought to close my weekly $42 covered call for a profit. I sold to open this position last week for a $51 credit. Today I closed it capturing $41.
Now, you might be asking why close when it looks like there is NO WAY KO gets back above $42 by Friday? Great question... well number one, you never know what can happen in this "buy the dip" environment, and two, when I've already got 80% of the original credit available to me, why risk losing it for the last 20%? That's just how I roll... others may be different and that's fine.
Next up lets talk about this KO spread I set up yesterday. I'm in an August 42/41 credit put spread, and boy right now it's messy. So here's how I'm playing this position... I'm going to see if over the next week or so we get any bounce back. If not, I'll roll the position out to September, maybe even October. The great thing about "rolling" out a spread is you avoid a loss.
Say what?! How is this possible? Well technically you do take a loss, but on the same transaction you are selling a further dated spread so you are also pocketing a credit. When it's all said and done you've got an account credit. Now, how much credit you have depends on what strikes you buy in and what strikes and expiration you sell.
So for example... I'm in the August KO 42/41 put spread with a $270 credit in my account. If I rolled this position out right now to say the September 41/40 it would cost me $260 with commissions. So as you can see I would still have a $10 NET credit on this trade while at the same time rolling down my spread to a 41/40. This gives me a higher probability of the September spread expiring worthless. The catch is though that I keep my buying power tied up longer than I'd like. Basically it's dead money for a couple months, which sucks. So maybe for you it's worth it to take a loss over tying up capital for two months. For me - it's not.
However, let me show you one more example. How about instead of rolling the strikes DOWN, I sell a September 42/41, which are the same strikes I have now - just different expiration date. That trade would cost me about $60 after commissions. So in this case I'm left with $210 of the original premium AND I've just bought myself more time for KO to recover from this earnings hit.
I hope this makes sense. I'm always happy to answer questions or take any feedback you may have. Email me at email@example.com