Alerts & Commentary
LDK Straddle – Strategy Discussion
LDK Solar
Below is a discussion on a Long-Term Straddle Strategy based on a discussion with Coach Fitzg.
Coach BD
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Coach,
This a general question about adjustments that comes out of a straddle position I am holding. I’m long a JAN 09 - 45 Strike Straddle in LDK Solar.
On 8/12, I sold a SEP 35 Put for $1.95 [Coach BD] ST Income generation and risk reduction on the Put side of the Straddle…
With the stock getting a bounce from a good earnings release, on 8/20, I bought back the Short 35 Put and Sold the Short SEP 40 Put for a Credit of $.95 [Coach BD] Rolled up the ST Income Short side to the next closer strike to the money to collect more ST premium and income…
Just today, LDK revised their ’09 outlook UP and is trading up around $4.50 to just over $50. I am thinking of rolling up 1 more time to the $45 strike.
The resulting position is what confuses me a little. I would then be Long JAN 09 - 45 Puts and Calls and Short SEP 45 Puts. I entered this into the analysis tool on TOS and it appears to be a good move. However, I never have had a vertical of $0 before. I assume that the Put Side of the Straddle is now a Calendar Spread, correct…?
Is it OK to sell short term premium against a longer term position at the SAME strike?
[Coach BD] You are correct Joe. if you roll that Short SEP 40 Put up once more to the SEP 45 Strike you will have created a Diagonal Put Calendar Spread, and that is fine. However, remember that if you do that you lose any protection of your gains below $45, except for the additional premium decay from the faster decaying Short SEP 45 Puts vs the slower decaying JAN 45 Puts.
It appears there may be some overhead resistance @ the $50 level, at least in the ST, and after a pretty big run-up over the past two weeks. I wouldn’t be surprised if this gap higher was met by some healthy profit-taking at these levels. The stock has run from $35 to $50 in just two weeks, and that suggests to me that there may be a healthy pullback in the near future. Perhaps as much as 50%, back to the $42 – $45 range.
Why not wait a few days to see if the stock does make a healthy pullback, and if it does, then it may be time to roll up those Short SEP 40 Puts to the 45 strike for a better Credit. In the meantime, it would not be a bad idea to prepare for that roll-up plan by purchasing, maybe, an OCT 40/35 Put Spread while the stock is way up here near $50 in anticipation of that pullback, which would offer you some significant downside cover protection if the stock did pull back well below $45 after you roll that SEP 40 Put UP to the SEP 45.
Does that make sense…? The first thing we always want to think of is how to protect the gains. You have the basic strategy correct, but think first about what the movement may be from here and how to protect against that move, before executing a strategy that may ADD risk to your position rather than reduce it.
Capiche…?
Coach BD
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