Three months ago I opened a simple two-legged option position in GLD (https://itawealth.com/is-inflation-risk-likely-to-increase-a-low-cost-option-strategy-for-possible-participation/). This position gave me the option to buy 100 shares in GLD at $120 ($12,000 value) before expiry in March 2021 (12 months away). It cost me $3,500 to acquire the position and this was my maximum risk.
Over the past 3 months I have adjusted this position (reported in the above post and at https://itawealth.com/gld-option-position-update-15-may-2020/ ) such that, as of 7 July, I was showing an (unrealized) profit of $1,626 and had reduced my risk to $1,245.
While I could just keep this option to control 100 shares of GLD I have decided to illustrate another option. Since I started this position with $3,500 risk I will assume that I am comfortable with this as the maximum risk that I am prepared to take on a position in GLD. Now, since my current risk is only $1,245, I have an opportunity to add to my position providing the risk on my new positions does not exceed ~$2,255 ($3,500 – $1,245).
First of all, with GLD trading at close to the strike price of the July 170 Calls that I am short, I will roll these Calls up (to the 172 strike) and out (to the August expiration). I can do this for a 1.28 credit ($128). Next, I will buy another Call Option that will give me the option to buy another 100 shares of GLD. Based on my maximum desired risk level and current option prices I decided to buy 1 contract of the 160 strike Call Options expiring on the same date as the Option already held – i.e. March 17, 2021. This Option was selling for 15.70 ($1,570) with an intrinsic value of ~$1,400 i.e. at a premium of ~1.57 ($157). I need to cover the cost of this premium so I also sold another 172 strike Option expiring in August (i.e. at the same time/strike as the Option that was rolled up and out as described above).
This now leaves me with 1 long Call Option at the 140 strike (previously rolled up from the original 120 strike to bring in credits) and 1 long Call option at the 160 strike (new position) with both Options expiring on March 17 2021. I am also short 2 Call Options at the 172 strike expiring in August 2020. The PnL graph looks like this:
When the dust settles I am left in control of 200 shares of GLD (that I have an option to buy for $30,000 – although I don’t plan on doing this) with a maximum risk of $3,314:
The above figure shows all the purchases/sales/adjustments in this position to date.
I would have liked to buy my new long Calls with Options expiring in June 2021 (12 months away) – but they were too expensive and would have put me above my maximum $3,500 risk limit, or would have required a higher premium. The August 2020 Calls were sold at ~3.00 so the premium has been covered.
Update: 21 July, 2020
With GLD continuing it’s move higher, price has now reached the strike price of my short Calls expiring in August (31 days away). In order not to limit my potential profit, should GLD move higher, I need to adjust this position. Normally, my ‘rule’ is to roll up (in price) and out (in time) so as to bring in a credit and, consequently, reduce risk. However, in order to follow this rule, the best I could do would be to sell the 175 Calls expiring in September (~60 days away). So, the question is “do I think GLD will move up ~3 points in the next 60 days?”. I think this is probably very likely, so I would like to sell Calls at a higher strike than $175. I would also prefer not to have to “sweat it out” for 60 days.
Looking at current prices, I can sell $178 strike Calls (with -27 Delta), expiring in August at 1.27 ($254 on 2 contracts). However, I have to buy back my $172 strike calls at 3.33 (after selling at 2.99) – that will cost me $666, for a net debit of $412 – and, consequently, increase my risk by $412. This is something that I don’t want to do (to increase risk). Therefore, in order to cover this cost I can roll up my long Calls expiring in March 2021. If I roll up my $140 strike Call to the $150 strike price I can generate a credit of $909 (on 1 contract) – easily enough to cover the debit on the roll-up of the short Calls.
My resultant position then looks like this:
And the new risk/reward situation looks like this:
With risk reduced by $497 from $3,314 to $2,817 ($909 – $412). Return on Risk increases to 74%.
Update: 23 July, 2020:
With GLD quietly continuing it’s charge higher I have, again, adjusted my position as price reached the 178 strike price of my short Call Options. Since it has only been 2 days since I last adjusted the position, and there is still more than 15 days to the expiration of the August Options I have rolled my 178 Calls up $6 to the $184 strike price. As in my last adjustment, this was done for a debit ($396 on 2 contracts) so I have also rolled my long 150 strike Call, expiring in March 2021, up to the $155 strike for a $424 credit – thus covering my costs and reducing risk.
In tabular format the current PnL situation now looks like this:
with maximum risk at $2,747 and (unrealized) profits of $2,510 or a Return on Risk of 91%.
Update: 31 July, 2020:
With GLD continuing it’s relentless close higher, price has again hit the strike price of the short Calls ($184). This is where I normally adjust my position and roll the short strike up. GLD hit $184 on Tuesday (28 July) and I have been watching prices carefully. The reason that I am hesitating here is because current price is sitting around $186, or the historical high reached in 2011 and I am waiting to see whether this offers any significant resistance. If price sits at current levels for the next 3 weeks there is ~$500 in time decay that can be realized from holding the current position.
Graphically, the current PnL position looks like this:
and, in tabular format:
the position is showing $3,356 (unrealized) profit with $1,864 risk – or 180% return on risk.
I will continue to watch this closely and will roll up if price looks like breaking higher.
Update: 4 August, 2020:
Since the ~$185 price level only seems to have offered mild resistance to the upward movement of GLD prices I have adjusted my positions:
I have rolled the short $184 strike Calls expiring on March 21 to the $190 strike Calls expiring 2 week later on September 04. I was able to do this for a debit of $397 (on 2 contracts). Since this adds risk to the position I have also rolled the longer-term 155 strike Calls expiring in March 2021 up to the $160 strike price. This reduces risk and I was able to do this for a credit of $435.
The current profit/loss position now looks like this:
showing $3,560 (unrealized) profit with a maximum risk of $1,826 – or a 195% return on risk.
Performance of this position since it was opened on 30 March looks like this:
Update: 6 August, 2020:
This constant updating of the GLD inflation play is a little hectic – but, the good news is that the position is making nice money. Although the position might seem a little complicated/confusing it is really quite simple. As of the open this morning I was long 2 contracts of the $160 strike Calls expiring in March next year and short 2 contracts of the $190 strike Calls expiring on 4 September (~4 weeks). With GLD opening up again today, and trading above the $190 strike I have made two more adjustments:
- I have rolled the $190 short Calls up to the $195 strike price (with GLD currently trading at ~$193). This was filled for a debit of ~2.40 ($480 on 2 contracts);
- To cover the cost of this transaction (and more) I have also rolled the long March $160 Calls up to the $170 strike. This was filled for a credit of ~8.00 ($1,600 on 2 contracts).
This significantly reduces the maximum risk on the trade to just a little over $700 with an unrealized profit of $3,864 – or 545% return on risk.
Of course, I did not have to roll the long calls up $10 in order to create sufficient credit to cover the debit paid to roll the $190 Calls up $5 – but I have taken this route to allow ~$2,800 to be available for a new position – on the basis that I have always been prepared to risk a maximum of $3,500 on this trade. Readers that have been following this trade will remember that I started off buying 1 contract (controlling 100 shares of GLD) of Call Options expiring in March and, after making adjustments to lower risk, I was able to add another contract such that I now have the option to buy 200 shares of GLD. Look for a new post where I will add a new contract to control another 100 shares – still keeping my maximum risk on all 3 contracts to less than $3,500.