I just rolled my position on FXI (china ETF) and wanted to get your advice on whether I did the right thing so that I
continue to learn.
Around March 21st I sold an April FXI $133 call when the underlying was at $127 (this was in line with my game plan
of selling 4-5% OTM calls) for a permium of of $5.60. By April 4th FXI had shot upto 145.68
On April 4th the same call was selling for 14.50 ( therefore time value was $1.82). I decided to buy back the call at
$14.50 and then I sold the May 154 call for 6.40. This is somewhat similar to the rolling up and out move you describe
in your book "create your own hedge fund".
My reasoning for making this trade was that the the time value on the deep in the money April 133 call would be much
lower than the out of the money May 154 call, and that if I waited until expiration firday to roll, then I would
probably get much less for the May 154 call. I would like to know what you think about what I did? Would you have done
I like your trade - but ONLY if you still want to own that fund and invest additional money into the position.
Some traders like to stay with winners and continue to invest money.
Others never pay a higher price than they paid originally.
Bottom lne, if you were okay with the idea of investing another $800 per 100 shares, then I agree with your thinking 100%.
Regarding the timing of the trade, the time premium is important - but if the underlying ETF rose in price, the April call would increase in value faster than the May call you sold - anda it would cost more to roll the position. Obviously, if the ETF declined, then you could roll for a smaller cash outlay. Thus, you should consider two factors: the time premium you mentions, plus whether you wanted to hold the current position longer and take the risk that the FXI would move higher.
Would I have done the same? I cannot say because for me, the deciding factor would be whether I was willing to invest more cash to continue to own this specific ETF. And that decision is not easy to make. If you want to continue to own it (obviously being bullish), then you did the right thing.
Regards to you,
Mark D. Wolfinger
The Rookie's Guide to Options:
The Beginner's Handbook of Trading Equity Options