Purchased TIPs in $106 range not expecting recent highs we have been seeing. I am now trapped-for lack of a better word-in 75 Dec $110 calls. Do any of the following scenarios make sense or is there another logical way or idea to unwind and reset the trade to capture more profit.
1. Buy Dec. $110 @ $2.00 and sell Mar. $110 @ $2.40 for a extra $0.40 per share when called away in Dec if not before.
2. Buy Dec $110, and sell Mar. $111 @ $1.85 for a $1125.00 transaction loss but a $1 higer strike price.
3. Buy Dec $110's, sell Mar. $112 @ $1.45 which will cost me $$3656.00 upfront but, I could possibly pick up $1.55 per share plus any interest payments along the way.
To be clear - you are currently short the calls, right? In other words, you sold covered calls to make a little extra cash.
Before I get to my real answer, this illustrates my main problem with covered calls - you lose control of sell timing. You could buy back the calls and then sell the TIP position, but psychologically it feels more like a loss, even though the net dollar amount says its a gain.
Back to your question - your choice depends somewhat on whether you want to continue to hold TIP or not.
If you don't mind selling, then simply keep your existing short call position and see what happens - if it's in the money, it will be exercised and 7500 shares of TIP will be sold at $110 at options expiration.
If you would prefer to hold onto your position, I would do one of the following:
1) Simply buy my position back (apparently at $2). Psychologically, this is tough, as you are realizing a loss (on the calls), which feels like a real loss, even though you have an offsetting (and larger) paper gain in TIP. Of course, a realized loss combined with paper gain can be nice for tax purposes.
2) Roll over your options. Your 3 choices reflect the basic rollover methods - buy your current position back in and sell longer-dated options. Any of your 3 choices work just fine. Psychologically, choice 1 might be more preferable as it feels more like a win (even if it only a $40 win/contract minus brokerage fees). But $40/contract for 3 extra months? That's pretty stingy. But you do capture an extra 3 months of dividends over my choice #1.
And there is a downside to all your choices - you extend your lack of control out another 3 months. What happens if we have a bond crash in January? If you want to sell your position, will you really buy back your calls and then sell TIP or will that be too much of a hassle? What happens if TIP spikes to, say, 116, and you lose out on the gains because you sold the calls?
Yes,, you are correct in that I did sell the Dec $110 to earn a little extra cash. Hinesite makes that a stupid move. Fortunately, I have a wrap account and basically trade at zero so the number of transaction really does not matter. You are also very correct in that half of the trade is psychological.
I truly appreciate your intelligent and insightful post. Your comments have given me a few new items to consider. A couple of which I was not even considering.