HiPOS Update 10/25/18: Rolling down and out
By Jay Pestrichelli
This morning’s higher open afforded us the chance to do something we haven’t done in a while; roll the position down (strike prices) and out (date of expiration) for a net credit of 1.2%. What that means is we closed the existing position and simultaneously entered a new trade. The new trade is farther out of the money (the down part with put spreads) and has a new November 16th expiration that is three weeks longer (the out part).
At a high level, this action can be explained as if we executed Monday’s trade after expiration two days early.
This action did 3 things, two are conservative, and one creates more risk. The additional risk – We added three more weeks of exposure in this volatile market. However, we were most likely going to execute a trade anyway on Monday as mentioned above. The conservative side of the new trade is that we swapped out the risk of being within 3% of our exit to a level of 11% out of the money. We also generated another credit of 1.2% for a 3-week trade.
The details of the trade are as follows:
- Index: Russell 2000
- Position type: Vertical spread
- Short strike: 1325
- Long strike: 1275
- Risk (prob. ITM): 3% at time of entry
- Targeted return: 1.2%
- Distance OTM: 11% at time of entry
- Expiration: November 16th (A.M.) or 21 calendar days to expiration at time of entry