Not so long ago, I bought an out of the money bull call spread on ROKU - Long the January '21 25 call and short the July '19 50 call. I paid around $1800 to set up the spread. Now, if I don't roll this week, it will be closed out for me and I will collect maybe $2400, for a profit of 600. If I roll, I will pay 300 more to collect 500 in October, barring a mega collapse. That sounds reasonable, right? Invest 300 to make 500 in 3 months, a 67% return on incremental cash. But that isn't what we have here, is it, since I will have money tied up. It's more like I earn an extra $200 (500 paid in October, less the 300 I pay now) on 2400 profit that I could realize today - an 8% return in 3 months - still very good, but not a no-brainer. Thanks, I appreciate the wisdom of this crowd, so I asked here.Vince
Hey, Vince,You should always consider the merits of the incremental investment and not entangle your prior decision with the new one. If you roll, you're effectively closing the old position and setting up a new risk-reward. So I would consider what that is. Incrementally, you'll have $300 tied up in the trade to make $500. But in the incremental trade, how at risk is that $2,400 you're putting into the trade? If it's not substantially at risk, then you shouldn't consider it part of the denominator in factoring your return. If you could lose most or all of that money, then it definitely needs to be considered as part of your total return calculation. That's how I would think about it more generally. Jim
Jim,Appreciate your response - and in this case, the 2,400 is not at great risk. But isn't there an opportunity cost to be considered? To get that 200 on 300, I have to commit the 2,400 and cannot use it for other investments. The reason I am obsessed with this question is a similar situation where I had to commit over 10,000 to get a 500 return on 300 incremental investment. I am thinking how smart I am but then I wonder if it's more appropriate to say that the 200 profit is on 10,300 invested, not just 300.Vince
Yeah, Vince, a couple points:• you're running a calendar spread on ROKU, and if you let it close out, it'll be done with you sitting in cash, with full freedom to allocate the capital again.• you paid some pretty large Time Value (TV) on the 2021 long side, even if you were deep in the money.• selling the July 2019 and then rolling was your plan all along... and by rolling and selling repeatedly you hope to get back the TV you paid for on the long side and to reduce your effective cost basis in the 2021 long position?So what has changed that would make you stop that plan?https://www.google.com/search?q=roku+to+get+acquired&oq=...• ROKU has become a name with a bit of a target on its back. (Google search shows which financial press is already discussing it.) A buyout could come at a price much higher than any short term call you might sell; when that happens, it's probably the last calendar spread position for you. After that there will be a lid on the ROKU share price, making it hard to sell it again.You're right up against the end of the current TV on your calendar call right now; tomorrow and Friday are the right days to do this again, obviously. With the talks of a buyout, sell to a short timeframe (2 months, max?) and maybe you'll get to do it again. Aug/Sep market activity seems sluggish many years, I think you might be able to sell a call that doesn't need rolling, and then set up another one...
Thanks, Rt, appreciate the perspective. So back to my diary in early January. ROKU had fallen into the mid 20s and was recovering slightly into the low 30s. The MF folks were talking it up on their podcast. I did put on the BCS to eventually roll - actually, I usually do not employ that strategy - buying a very long in the money call and then selling a shorter duration one, but I did this time. With the stock at 32, I didn't figure on a triple in 6 months. But here we are. Good problems to have!Foolishly,Vince
I think there's pretty serious talk about Roku getting bought, not idle speculative chatter by analysts.Fox owns a chunk of ROKU that I bet they'd commit to a sale, since Rupert seems to be whittling down the number of things that can go wrong with his empire when he passes.MSFT, AAPL, NFLX, DIS all strike me as potential suitors. The chance to own a HW/SW platform that holds your streaming app and your competitors' streaming apps seems very attractive I bet to any/all of them.
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