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I have a diagonal call (GRMN) that is long 1/20/17 37.50 call and short 7/17/15 52.50 call. The stock is trading at $46.22

The short call is currently worth $0.08. It seems likely that it will expire worthless on July 17, about 6 weeks from now.

The usual strategy here seems to be to just let that expiration happen, before writing another call for income against the long call.

My question is: why or why not roll the short call early?

On one hand, it will cost me about $17 to buy back that call (8 bucks plus commission). I would not incur that expense if I just let it expire for full income.

On the other hand, only about 5% of the premium value remains compared to what I got paid. There is still six weeks remaining until expiration, and over that 6 weeks, there is only 8 bucks to be made at this point. In addition, in a diagonal call, there are a limited number of opportunities to sell a short call before the long call expires.

So the question: does it make sense to roll early in a case like this, to get some additional income, when most of the income has already been realized from the existing short call? Why wait until expiration?
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Sometimes it makes sense to roll early. Especially if there is some catalyst coming up that may move the stock.

But realize that, assuming you roll into the Oct 26th 50s, you will be giving up about 10% of your potential gain via that 8 cents. Or about 20% if you roll into Oct 26th 52.5s.
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For me, my broker doesn't charge commission if the option is $5 or less. I would wait to sell at that point. But since I pay $1.50 a contract, commissions don't really factor into my decision making. I look at a couple of things. What is the loss in buying power for the option(s)? Can I put on another trade that would be more beneficial?

Anytime, I can lock in 75% profit, I'd jump at that chance to close the option(s). There have been a lot of times, I've turned a "profit" into a loss waiting for expiration when the stock moved unexpectedly.

For me, I want to make a little money for each trade while at the same time learning about options. I don't really follow GRMN, so I don't know when earnings are or if they pay dividends. I'd just be a little wary around when they announce earnings. I'd probably close the option.
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"On the other hand, only about 5% of the premium value remains compared to what I got paid. There is still six weeks remaining until expiration, and over that 6 weeks, there is only 8 bucks to be made at this point. In addition, in a diagonal call, there are a limited number of opportunities to sell a short call before the long call expires. "

I would roll now, or exit the whole position now. Be efficient with your capital.

martin

(15 years experience trading options)
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By 'exit the whole position', do you mean sell the long call too? THAT would cost me money! The long call is down $2.98 since I bought it. Assuming that the stock (and the option price) does not recover before Jan 17, I need to sell more short calls to at least make up for that loss on the long call (and yes, I understand that there is a risk that the long call could decrease in value even more - especially since it's losing time value). I entered the position on MFO advice - athough I can't remember at this point whether is is an 'official' trade or a TYCM - so I don't know if there will be further advice from MFO.
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Hook!

50 cents a trade? Who is your broker?
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Sorry, buck-fifty. Still.... ;-)
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I use TD Ameritrade. For options $5 and under it's free ($0.03 Fed tax). Normally, they charge $9.99 for trades, but if you sign-up under Dough.com or call them and tell them you use Dough.com if you have an existing account, they charge $1.50 a contract + fed tax.

Last year I made over 500 multi-legged option trades that cost a bundle at $10+ a trade. Someone on one of these MF option boards told me about the reduce commission if you just call them. I tell you what, it's making a huge difference in P/L and giving me the ability to be more agile in option trading.

I've looked at other brokerages, but ThinkOrSwim (TOS) is one of the best platforms I've ever used. I was willing to pay that extra commission just to use TOS.

horb
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"By 'exit the whole position', do you mean sell the long call too? THAT would cost me money! The long call is down $2.98 since I bought it. Assuming that the stock (and the option price) does not recover before Jan 17, I need to sell more short calls to at least make up for that loss on the long call (and yes, I understand that there is a risk that the long call could decrease in value even more - especially since it's losing time value). I entered the position on MFO advice - athough I can't remember at this point whether is is an 'official' trade or a TYCM - so I don't know if there will be further advice from MFO."

Demotage,


If you want to keep the position open, yes - hold your long call and roll now. (just make sure that you're comfortable holding GRMN long term)

Since you're still a member of MFO, have you posted your question over there? (I imagine that Jim likes GRMN and most likely thinks it's undervalued.)

Your thought process about "losing $300" on the long call isn't helpful.
You're going to have to change that type of thinking to be successful in the stock market:
- "Would I buy this stock today?".
- "Do I want to be invested in this stock longer term?". -- That's what matters. Don't "fixate" on a certain price (that you paid or where the stock has been).

sincerely,
martin
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Thanks Hook! I'm going to check that out! I'm at least going to tell my brother who used TDAmeritrade. (I'm with Options House/TM - 9 bucks an options trade).

Thanks Martin!

You are right. I do tend to think about my options positions that way, and it is a weakness I'm working on ;-)

MFO continues to recommend GRMN, so I'm more-or-less comfortable owning the long call (although I'd rather have bought it at today's price rather than the price I did pay ;-). My original question was aimed at maximizing income from selling the short calls.
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