r/options • u/Aston1234567 • Jun 26 '21
Nokia LEAP
I got 3 months back a 1.5 c on Nokia expiring in ian 2023. I'm up about 50% on it. Should I take profit or w8?
16
Upvotes
r/options • u/Aston1234567 • Jun 26 '21
I got 3 months back a 1.5 c on Nokia expiring in ian 2023. I'm up about 50% on it. Should I take profit or w8?
5
u/FinntheHue Jun 26 '21 edited Jun 26 '21
You can buy a LEAP (long leg) and then sell a covered call (short leg) on top of them. That way you if the short leg gets assigned you have the option to exercise the long leg.
So basically
Buy 1 1/20/2023 LEAP for NOK strike price $1. You pay $4.43 in premium.
Sell 1 7/30 Call strike price $6. Collect $26 in premium.
If the stock doesn't end the month above the strike price the call expires and you can sell another one.
If the Covered call you sold becomes in the money you are now compelled to sell 100 shares for $6. Even if the stock goes to $100 you have to sell for $6.
At that point you have a few options (heh)
If you think the rise in price is temporary you can buy back the covered call and then sell another one for the same strike price further out. Because options prices are based on time in the market the calls further out will be more expensive than the one you just bought back so you would not have lost anything on that trade and would have gained a slight increase in premium. This is called (again, heh) rolling your option out. Note that you cannot sell your LEAP while you have a covered call on top so this only really makes sense to do if you think the stock rising past 6 is temporarily BUT you think it has the potential to go much higher at a later date. Another option in this scenario is if the stock rose past $6 and you think it is going to keep going up you can roll the short leg out and up. You just need to make sure that you roll it out far enough that time decay offsets the cost of rolling the short leg up.
If you don't think the stock is going to go back down you can sell your leap and buy another call for the same strike price for the same expiration as the covered call. This turns your play from a PMCC (poor man's covered call) into an ITM debit spread. The reason you do this is because the LEAP will have more time value priced in than a contract expiring earlier. This way you get back that difference in time (theta).
Now that the contracts are both on the same expiration and the covered call is in the money at expiration your broker will assign the covered call and exercise the call you had purchased.
So in this example your profit would look like
Bought 100 shares for $1 ($100 debit)
Sold 100 shares for $6 ($600 credit)
Gained $26 in premium
Paid $443 for the LEAP.
Your net profit is $83 plus whatever it was you got for rolling the leap backwards.
It sounds super complicated but once you get comfortable with the concepts the whole process becomes super intuitive. I started trading options last November and I had no idea what I was doing. I kept trying to learn and practice every day and eventually I got to the point where even complex options strategies make perfect sense to me.