8/17/12 Trade Alert: Three August Rolls

Please Note: These recommended trades only apply to those Personal Finance Income Plus members who already have positions in the mentioned stocks and covered calls. Do NOT do these trades as initial positions.

1. Diagonal Spread Roll of Union Pacific (NYSE: UNP) to November

“Buy to Close” August $115 Call


and


“Sell to Open” November $125 Call


Option Symbols: UNP120818C115 and UNP121117C125

Limit Order Price: Net debit of $4.75 or less ($475 per spread)


If your broker doesn’t allow option spreads, then you’ll have to do two separate single-option trades:

(a) “Buy to close” August $115 call for a debit of $9.95 or less ($995 per contract)


(b) “Sell to open” November $125 call for a credit of $5.20 or more ($520 per contract)


Directional View for Underlying Stock: Neutral to bullish


Personal Finance Portfolio: Growth

  •    Tell your broker:
  • For a diagonal spread (preferred):

I’d like to enter an option spread order on Union Pacific (UNP) stock. Specifically, I want to buy to close the August $115 call and sell to open the November $125 call for a net debit of $4.75 per share or less.

  • For a two-part trade:
I’d like to buy to close the August $115 call on Union Pacific (UNP) stock for a debit of $9.95 per share or less.

I’d like to sell to open the November $125 call on Union Pacific (UNP) stock for a credit of $5.20 per share or more.

Please note: The important thing is to achieve a net debit on the roll (i.e., both trades) of $4.75 or less. The specific limit prices of the individual “buy to close” and “sell to open” trades are just starting points and should be adjusted as needed, keeping the net debit of the overall roll in mind.

 

2. Diagonal Spread Roll of Monsanto (NYSE: MON) to October

“Buy to Close” August $80 Call


and


“Sell to Open” October $87.50 Call


Option Symbols: MON120818C80 and MON121020C87.5

Limit Order Price: Net debit of $4.45 or less ($445 per spread)


If your broker doesn’t allow option spreads, then you’ll have to do two separate single-option trades:

(a) “Buy to close” August $80 call for a debit of $8.30 or less ($830 per contract)


(b) “Sell to open” October $87.50 call for a credit of $3.85 or more ($385 per contract)


Directional View for Underlying Stock: Neutral to bullish


Personal Finance Portfolio: Growth

  •    Tell your broker:
  • For a diagonal spread (preferred):

I’d like to enter an option spread order on Monsanto (MON) stock. Specifically, I want to buy to close the August $80 call and sell to open the October $87.50 call for a net debit of $4.45 per share or less.

  • For a two-part trade:
I’d like to buy to close the August $80 call on Monsanto (MON) stock for a debit of $8.30 per share or less.

I’d like to sell to open the October $87.50 call on Monsanto (MON) stock for a credit of $3.85 per share or more.

Please note: The important thing is to achieve a net debit on the roll (i.e., both trades) of $4.45 or less. The specific limit prices of the individual “buy to close” and “sell to open” trades are just starting points and should be adjusted as needed, keeping the net debit of the overall roll in mind.

 

3. Diagonal Spread Roll of Freeport-McMoRan Copper & Gold (NYSE: FCX) to November

“Buy to Close” August $36 Call


and


“Sell to Open” November $37 Call


Option Symbols: FCX120818C36 and FCX121117C37

Limit Order Price: Net credit of $1.43 or more ($143 per spread)


If your broker doesn’t allow option spreads, then you’ll have to do two separate single-option trades:

(a) “Buy to close” August $36 call for a debit of $0.05 or less ($5 per contract)


(b) “Sell to open” November $37 call for a credit of $1.48 or more ($148 per contract)


Directional View for Underlying Stock: Neutral to bullish


Personal Finance Portfolio: Income

  •    Tell your broker:
  • For a diagonal spread (preferred):

I’d like to enter an option spread order on Freeport-McMoRan Copper & Gold (FCX) stock. Specifically, I want to buy to close the August $36 call and sell to open the November $37 call for a net credit of $1.43 per share or more.

  • For a two-part trade:
I’d like to buy to close the August $36 call on Freeport-McMoRan Copper & Gold (FCX) stock for a debit of $0.05 per share or less.

I’d like to sell to open the November $37 call on Freeport-McMoRan Copper & Gold (FCX) stock for a credit of $1.48 per share or more.

Please note: The important thing is to achieve a net credit on the roll (i.e., both trades) of $1.43 or more. The specific limit prices of the individual “buy to close” and “sell to open” trades are just starting points and should be adjusted as needed, keeping the net credit of the overall roll in mind.

Price Adjustment Regarding These Roll Trades

Unlike the opening of an initial trade, the Union Pacific and Monsanto trades involve closing in-the-money call options before they get automatically exercised against us. Consequently, we do not have the luxury of patience and possibly passing on the trade (unless you are willing to sell your Union Pacific and/or Monsanto stock). We will need to be flexible with our limit prices and adjust them if necessary as we get nearer to the market’s close on Friday, August 17th.

The limit debit prices I suggest above are starting points. If either don’t fill within a few hours, I recommend raising the limit debit price by a few cents per share and waiting a few hours. If this adjusted limit price doesn’t fill, adjust again by a few more cents. Repeat the process until you get filled.

For the Freeport-McMoRan trade, there is less risk of having the underlying stock called away because the stock price is currently below the $36 strike price. As such, you can be more stubborn about your limit prices for the roll credit. If the limit credit price doesn’t fill, you can wait until next week to sell a November covered call (unless the underlying stock moves above $36 during Friday’s trading, in which case you’ll need to buy back the August $36 call prior to Friday’s market close).

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