Covered Calls and Cash Secured Puts (Part 28)

Recall that MacDuff’s general philosophy is to raise cash with every trade.  As my cash cushion continues to increase, eventually the stock will find a bottom and I will be able to exit the trade with a profit even if the stock has decreased over that time interval.

In the last post I showed a debit (i.e. cost money) adjustment and suggested the inclusion of the raised strike price when evaluating the adjustment. No I did not raise cash but raising the strike price to the stock’s current price essentially releases additional money, which is just as good as being paid.

I run into difficulty with this argument when considering a lowered strike price. A stock falling enough to require a lowered strike price (i.e. “rolling down”) to collect additional premium is what MacDuff terms an “Interim trade.” If I include the raised short call strike to the return calculation then would I also encounter instances where rolling down should factor in the lowered short strike to the calculation?  If I did that then most Interim trades would be debit trades.  For example:

This adjustment buys to close the short Feb(36) 21 call and sells to open a Feb(36) 20 call.  The net credit is $0.42.  By lowering the strike price $1, though, I have an obligation to sell the stock for $1 less if I get assigned.  Yes I brought in $42 by rolling down but I cost myself $100.   This is a debit adjustment; why would MacDuff allow it?

Something seems amiss with this comparison.  With the RO & Up adjustment, I changed expiration months.  The time I sold allowed me to calculate an annualized return.  Here I did not sell time and the return therefore cannot be annualized.

I think the resolution has to do with the mirror image thinking I discussed earlier. The comparison should not be between RO & Up and rolling down. The comparison should be between RO & up for a call and rolling down and out for a put.

I will continue this discussion next time.