What sbrown said is good advice if you have a stock with a very tight bid / ask spread. WMC is not that stock. Whenever you short puts you ultimately have to ask yourself whether you would be good at owning the shares at the strike minus your credit. You and I have about the same BE. I am presently at 1.50 credit on the 13Jan22.50s, meaning I would own the shares at 21.00. That is a great price IMO.
In fact it fits in perfectly with my wanting to own good stocks with 16% yield in 2013. At 21.00 PPS it trades just over 16%. So does NYMT. I will wait until closer to OPEX, or I am assigned, before I change anything.
Who thought we could own these mReits at yields of 16% +. I am a buyer of NYMT, ARR, and WMC. I will wait for earnings on AGNC. I think no matter what the earnings, the PPS might tank. 31.00 or lower would be the price to buy. That will give us 16% on AGNC, going forward.
Btw, if you roll down(to the 20's) now, you lose the leverage that a zero spread offers at OPEX in Jan. on the short leg. IOW, suppose we are at 20.00 in Jan. The 22.50s are worth 2.50, so we are down 1.00. Buy back the 22.50's and roll out to Apr or June, to the same 22.50s for 3.50. Net credit +1.50, minus 2.50, + 3.50 = + 1.50. Nothing has changed except you have more time now for recovery of the PPS. Of course, if the PPS keeps going down you eventually lose, but so does everyone else who owns the shares, and eventually we all die in a nuclear cloud. But I am slightly more optimistic about WMC, and IMO, so are the directors at Legg Mason....;-)
Well, this is what I did today (probably unnecessary):
I bought back the 10 13Jan22.50 puts @2.80 (sold them for $1.60 prior) thus locking $1,200 loss on the trade. Then I Re-sold 10 13Apr20 puts for $1.85 and collected $1,850 premium.
According to my calculations that lowered my profit on the trade to $650 if they expire worthless in April. ($2,800-$1,600=$1,200loss) so $1,850-$1,200=$650collected from this WMC trade and my BE is now $19.35 (I think :)
I wasn't optimistic that we'd be definitely over $22.50 in Jan, that's why I went with a lower strike and further month.
"""Btw, if you roll down(to the 20's) now, you lose the leverage that a zero spread offers at OPEX in Jan. on the short leg. IOW, suppose we are at 20.00 in Jan. The 22.50s are worth 2.50, so we are down 1.00. Buy back the 22.50's and roll out to Apr or June, to the same 22.50s for 3.50. Net credit +1.50, minus 2.50, + 3.50 = + 1.50."""
Doc, I just re-read your post and found your numbers confusing, I thing it should be:
Net credit from first trade is +1.50 , minus 2.50, +3.50 = + 2.5, right? or am I missing something to the equation?