Real Buy-Write Examples: RIMM update   Leave a comment


The last options post explained the RIMM position I setup on April 22nd. The market has taken quite a dive since then and here’s a one-month chart of RIMM:

one month chart of RIMM

One month chart of RIMM against NASDAQ

The blue line overlaying the stock price is the NASDAQ composite. I’ve changed the red horizontal support line to show my cost on the chart, which you can see is above the recent range for the stock.

As of today, the position is down 5.38% or about $1,100. This is not good and definitely not what I want, so I wanted to cover the potential options I have for the position.

Let’s start with a couple basic “risks and obligations”. Remember that I am long 300 shares of RIMM and I am short 3 May 22 $70 calls. Since I’m using a cash account, while I have an open short call position on RIMM, I must maintain a long stock position to cover the obligation I have entered into by writing the May $70 calls. If I want to sell the stock, I have to close the options by entering a “buy-to-close” order for three May $70 calls on RIMM.

So what are my options with this position? (prices below are as of the close today)

  1. I can leave the position open and hope that the stock rises back above my cost and potentially higher. If the stock gets above my breakeven cost of $68.14 by Friday, I can potentially make a profit. If I let it ride I will get to keep the $958.75 I received in option premiums by selling the calls in the first place. This was my intent when I sold the calls and should always be the intent when you setup a buy-write.
  2. I can close the position and take a loss. Going from today’s prices, I would have to “buy-to-close” three May $70 calls at a cost of around $0.11/call with fees. I can then sell my shares at about $65.39. Here is how that works in actual numbers: sell-and-close calculations(Note that a stock-only position would lose $1,792 (8.4%) under the current conditions if sold.)
  3. I can roll the position forward by closing the May options and writing calls further out on the calendar. However, since the stock is below my original breakeven price of $68.14, I will not get as much protection from the calls because the premiums will be lower.  For example, a June $70 call is now bid at $1.41. I also want to make a certain amount off of the investment each month or my money may be better used elsewhere. I would want to write for June to leverage the time decay as much as possible. However, June is also the end of a quarter, and the option chain has price increments of $2.50. I can write calls at $65, $67.50, $70 and so on. The number one consideration for the next write will be to not write it any lower than my cost, which would include the options written in May and the potential June options. The next consideration would be maintaining some type of profit potential and lastly to ensure a decent level of protection. Here’s a little spreadsheet to rough it out:rolling forward analysis
    • You can see that at $60 and $62.50, I can obligate myself to lose money. This would be a huge mistake, because if the stock advances, it will cost even more to undo the trade.
    • The $65 call gives me very little protection and would cost money after brokerage fees.
    • The $67.50 calls give me some very limited cost offset (I would still be in the red) and doesn’t allow for any better profit than the original position in exchange for holding the stock for another month.
    • The $70 strike gives me a good profit potential for the two months but doesn’t really help much in the way of cost offset – I’m still underwater if I write June $70 calls.
    • The $72.50 and $75 strikes offer good potential profit margins but very limited cost offsets.

So I’m not impressed with any of the June calls, except maybe the June $70, which gives me a good monthly rate of return but is disappointing in terms of offering any additional downward protection.

We’re not talking about buying put protection on this position, but that is another option that I could explore. Long puts increase the net cost of the shares in the position but can limit losses to a fixed known value. Ultimately, If I had expected such a pullback in the market or RIMM stock, I would not have purchased the stock. What pullback I expected has been exceeded and now we’re in a bad position.

So what to do? Part of this game is patience, and I’m going to let it ride. I still like the news I’m hearing about RIMM’s activities in markets and partnerships around the globe, and I’m still positive on the market. Once the May options expire, I’ll re-evaluate the position.

Next time I’ll either say what happened with RIMM or describe a position I have open for May expiry in Intel Corp (INTC). The INTC position is a Collar, which has a fixed max loss and fixed max profit.

Thanks for reading!


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