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Managing the Repair Option Position in RCL - Option Trading Update

 

The Setup

purchased 100 shares of RCL @ $40

sold 35 25 Put Spread and a 40 Call Expiry August 19 for $5.00

the original post is here: https://www.unpackinvesting.com/2022/07/using-options-to-recover-from-big-move.html

Management

After a month holding and the stock rallying up to around $38, I closed the options for $2.28.  Even though I could have waited longer to see if it goes to zero, I would have much more increased gamma risk (gamma risk is changes in value with respect to stock price, it gets really big the closer it gets it expiration).  I collected a total of $5 - $2.28 = $2.72.  Which is just over 50% of the original option premium for holding the position for about 66% of the time.  Generally, when options get to within 2 weeks of expiring it is a good time to re-asses the structure and potentially close out the trade or roll the position further in time.

Takeaway

I originally purchased shares for $40, but the price quickly dropped with the volatility staying elevated.  I sold an option structure (Put Spread and Call) to collect $5, but closed out the options for $2.28.  Effectively, I was able to reduce the cost basis $40 - $2.72 to $37.28.  Currently, the stock price is close to the price I purchased it (around $40).  If there is another large move and volatility stays elevated, I will look to sell more options to reduce the basis further.  As for the actual stock, I still plan to hold for a long time as I enjoy the Shareholder benefit whenever I got on a Royal Caribbean cruise.
 
Disclaimer - The trade worked out like I hoped, but it could have easily gone against me.  I'm not your financial adviser, so please just see this as education.
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