I have an ITM Put covering a DIA position. I could wait 'til expiration, but I would like to capture some of the value of the Put (and keep the stock) - i.e. reduce my cost basis.
I know I could sell the whole position, but I would like to find a more elegant solution.
I thought of rolling the Put down by selling the ITM Put and buying an ATM or maybe slightly OTM put, but the bid-ask and time-value I end up buying makes that not a very profitable approach - about a third or so of what I would gain at expiration. I feel pretty sure we'll go higher, so I'd like to capitalize on that if I can.
I also thought of buying a shorter-expiration ATM put instead, but then I lose the longer-term protection I've built up.
Right now, I am just leaving the position on as at least all my capital is protected.
Has anyone got any ideas they could share on a way where I can cash-in on some of the put value whilst maintaining the level of protection I have (100% right now - looking great, today).
The trick is to move the position to lower strike as the delta moves above .9
You want to keep the delta healthy .75 or better but when you start at .9 and see a 300 point move in your direction the dealta goes to 1 and you trade at intrinsic... a move against you cost you dollar for dollar, buy replacing with a put with a lower delta .75- .80 you quickly return to the higher delta if the move continues or if it turns against you the delta moves lower and you only lose 75 cents aon a dollar move. you also unlock a few dollars and maintain the overall protection.
Of course the positions are pretty deep in the money for these conditions to be relevant.
Exactly what I tried to do, but the time value of the Put I bought (December - yep, I'm a dumb-ass) makes it really hard for delta to get even close to 0.9. This is what put me in the bad situation, and now that over half my position is intrinsic value, any roll-down, even to a much earlier month costs me a lot of time premium.
It's a nice problem, but it is still a bummer knowing I can't average-down my stock cost without giving me market risk that I presently don't have.
If my option premium cost were already covered, I wouldn't care, but it's not; so even a further decline is not good unless I (1) sell the stock or (2) sell some high-value calls (at which point, we should have a strong market rally of course) or (3) risk selling puts (not what you call an attractive proposition today).
If you want to keep your stock (ugh), then why don't you just sell OTM front-month calls against your stock, and collect the degradation on the time-value? Or sell ITM calls and make $$s (loss of intrinsic value) as the market drops.