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Rollover of options


ageofsocrates
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Hi,

 

Had a question and was hoping someone could help.. basically would like to ask how can I do a rollover of some options contracts? Do I just close the existing contracts (i.e MSFT Sep 2011 $20 Call) and buy the new contracts (MSFT Jan 2013 $20 or can I ask my broker to carry it out for me (at a narrower bid/ask spread)?

 

Also, for a large LEAP options position, how does one deal with liquidity (e.g MSFT Jan 2013). Would open interest be the main consideration when looking at liquidity? Lastly, any recommendations for an options broker that provides dealing execution services? I checked with Interactive brokers but they mentioned that they will ask the clients to just place the orders online on their own (even for large sizes) 

 

Appreciate any guidance here.

 

 

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You should be able to transfer the positions entirely without selling anything. You don't need to close and open it. Closing and opeing it going to cause you extra cost without any benefit.

 

If you are transferring from one broker to another then just make sure that receiving broker can take option transfers. I don't think any major brokers will have an issue with MSFT options. Basically your whole holding gets trasferred from one to another account.

 

 

I don't understand why you want to have a broker placing the order for options unless you are dealing with huge quantity.

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You can't roll over an expiring option w/o selling it and buying a new option, as far as I know.  He isn't asking how to transfer an option from one broker to another. 

 

Regarding LEAPS, just look at what the bid/ask spread is during the day and try to put an order in somewhere in the middle.  Something like MSFT will be rather liquid. 

 

 

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Hi,

 

Had a question and was hoping someone could help.. basically would like to ask how can I do a rollover of some options contracts? Do I just close the existing contracts (i.e MSFT Sep 2011 $20 Call) and buy the new contracts (MSFT Jan 2013 $20

 

 

This is what I do. You give up a bit on the spread but its worth it. I would advise pushing out options slightly far in advance. If this was November alot of folks would be screwed on 2012 options.

 

Also yes for liquidity I would look at open interest and size of the Company. MSFT options should be fairly liquid, I have only had liquidity issues on KSP and ATSG options...

 

Most discount brokers are going to want the orders placed online or will charge you more to place them...

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Most often you will be either rolling 'Up & Out' (higher strike, & a maturity period longer than you previously did), or 'Down & In'. If the existing position is in the money you will have to sell, otherwise just allow it to expire.

 

For even the most liquid LEAP, liquidity will evaporate as soon as the long/margin equivalent becomes cheaper. Consequently, most strategies use T-Bill/LEAP combinations & hold to maturity.

 

SD

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T-Bill/Leap Strategy

 

As seller of a covered LEAP, the objective is to mimic buying the share today (at maximum margin) & selling in X yrs at the stated strike price.  IE: The seller sells the right, but not the obligation, to buy today’s $30 share at $50, 2 yrs out, for a premium of $3. The premium of $3 is the carry cost on the margin + a pricing adjustment for the greeks (volatility, time, etc)

 

The seller accepts the LEAP obligation, & uses the premium to buy a similar term (or roll shorter terms) T-Bill on margin. IE: Cost of $98, margin of $95, equity of $3. In 2 years ....

• The T-Bill will mature at $100. $5 of net gain to offset 2 yrs of carry cost. Positive carry.

• 30% chance of a $20 profit on the share already owned (70% of LEAPS expire worthless)

 

But during the 2 years the seller significantly reduces his/her risk ...

• If the seller did nothing, he/she would have a 1 asset $30 portfolio, exposed to the entire market risk on that share 

• If the seller sold the covered LEAP, he/she would have a 2 asset $128 portfolio ($30 + $98 T-Bill) that is only 23% (30/128) exposed to that single share. Most of the (corporate) share risk changes to (sovereign) T-Bill risk, & the seller gets the diversification benefit. If the T-Bill was actually a UK Gilt or a German Bundt, that benefit could be considerable.

 

Obviously not for everybody, & there are many variations, but something that you should be aware of.

 

SD 

 

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