Position Management for Profit – LITE Position Analysis Revisited

Married Put Position Management of LITE Phase 2

Last week we wrote (Phase 1 article) about some decisions that had to be made in the married put position analysis of LITE. Since then position management steps were taken to improve its profitability.

There were three alternative steps suggested:

  1. Liquidate now for a 15% profit after 4 months in the position
  2. Hold for more price appreciation, but if the price remained constant the profit would drop to 11%. And if the stock declined a 3% profit was guaranteed
  3. Write a $50 strike out of the money (OTM) covered call, which would guarantee 15%+ if the stock remained constant at $47.90 or went higher.

The investor chose step number three in the belief that the 3-D sensing technology developed by LITE would provide future growth. Therefore, rather than cash in now or just hold, he opted to earn some more income while waiting for continued stock price advance.

After several days way up on LITE stock, there are more position management decisions to make.

After several days way up on LITE stock, there are more position management decisions to make.

Over the weekend, Barron’s printed an article (by Tiernan Ray p.24) that discussed LITE and their 3-D sensing technology. The following trading day LITE advanced again to a high of $50.20.  And then advanced the next day to over $51.  Maybe this price movement should have been expected when the stock price jumped over the Bollinger Band on high volume.  An indication that something is different and very positive.

The continued rise in stock price to a high of $51.25, created several pleasant position management opportunities that were suggested in the Power Options position analysis:

  • The stock price rose to the strike price of the covered call just written and needed to be rolled up and out to allow for greater stock price appreciation.  In retrospect, it would have been even more profitable not to write the call and just hold for the price appreciation
  • The Put had only 30 days left before expiration and we would lose our insurance. But rolling the put out in time and up in strike price could lock in additional profits, more bullet proof, and buy more time.  Yes, it costs more to roll up the put.

Both of these management opportunities were taken advantage of, as suggested in the position analysis, to increase the potential profitability of the LITE position. The new position had the following characteristics:

  1. The guaranteed return moved from 3% to 11% by rolling the put up (IM#4) in strike price
  2. Moving the put out in time provided an extension of insurance time from 32 days to 122 days
  3. Rolling the call up (IM#2) to a $55 strike and out in time, provided room for LITE to continue moving up in price without being called

These actions have locked in more profit and provided time to see if this run up in stock price has the legs to go further.  As the stock price changes the Power Options position analysis will continue to look for profit enhancing opportunities.

 

About Ernie Zerenner

Ernie is a self-directed investor after having retired from the Hewlett Packard Company. He has been a stock and options investor for over 40 years and currently trades for his own account. He is an owner of both RadioActive Trading and PowerOptions and uses the tools he developed on both sites to find, analyze, and manage his trades. Most of his trading activity uses the principles of the Blueprint to hedge his investments for safety.