Need input with a collar/spread position

[DeltaSpread]

I am long 7000 shares of Eastman Kodak stock
I am short 70 call contracts $4 strike July expiration
I am long 70 put contracts $3.50 strike July expiration

The position above cost me a total net debit of $3.70

Yesterday Eastman Kodak stock was basically pinned in a tight trading range of 6 cents or so. The at the money calls and puts both started ramping with IV in the last 30 minutes. Calls and Puts went up significantly. I am sure this morning they will collapse a bit now that "the" news came out last night.

((Some of you may know there is a huge ongoing intellectual property suit with Eastman Kodak against Apple & Research In Motion. Although yesterday appears to be a setback in the street's view, the stock price tanked AH because the IP decision got pushed back til August 20th, it looks like according to some blogs I quickly skimmed, Apple did in fact violate one of the patents. I have to do my own DD this AM))

Anyways, would appreciate any input on my options here.

I know I could just let this spread ride for another two weeks, my effective cost basis would be as if I bought the shares for $3.70 if the stock price ends up between $3.50 and $4.00, both my short calls and long puts would expire worthless. Either dump the stock then or put on another spread for August.

I could cover my calls today and sell my puts as well, both would be for a significant profit. And do something for August, but obviously premiums would not be in my favor based on price action this AM.

 

[spindr0]

It's equivalent to a vertical so the only concern is direction.

With EK dropping, you have a "significant" gain on your options but a more significant loss on your stock. That's how collars work.

IV change is fairly irrelevant because the extra bump you receive for the sold calls is lost on the puts you buy. Receive more, pay more. Receive less, pay less.

There are games to be played with taking profit on the options but the success of that depends on getting a bounce and not ongoing drop.

 

[DeltaSpread]

Quote from spindr0:

It's equivalent to a vertical so the only concern is direction.

With EK dropping, you have a "significant" gain on your options but a more significant loss on your stock. That's how collars work.

IV change is fairly irrelevant because the extra bump you receive for the sold calls is lost on the puts you buy. Receive more, pay more. Receive less, pay less.

There are games to be played with taking profit on the options but the success of that depends on getting a bounce and not ongoing drop.

I kind of was realizing that after I typed the thread; vertical; meaning there is nothing I can do now really other than watch the direction of the stock price. At least my loss is capped at .20.

What is surprising though is that the loss on my stock position and the gain on the two option positions are getting more close to that .20 loss area than I would have thought for being two weeks out.

The reason why I mentioned IV, was because I have been tracking these options for weeks now.

The last couple days I was tempted to sell some of the July $3 strike puts. The stock price had been in the $3.68 range. The bid on the July $3 puts in the .16 range.

Well you know where this is going, this morning, the stock price craters from $3.65ish to $3.05ish and yet those puts are now ONLY bid/asking .07 by .08. I could have doubled my money had I just sold the puts naked, instead of being trapped in this three way position now.

And I have now looked into this, it was ruled yesterday that there are in fact certain parts of the EK patent that Apple is violating. It was actually a win for Kodak. However the case is getting kicked back to a judge to look at a specific part that he ruled on 6 months ago. But it took EK over 2 hours to finally draft a press release. By then all the market saw was that a FINAL decision was not made and they took the price down in AH to $2.95 area. I am just going to stay put. I basically can ride this out for two more weeks and know exactly what my loss can/will be.

 

[spindr0]

Quote from DeltaSpread:

I kind of was realizing that after I typed the thread; vertical; meaning there is nothing I can do now really other than watch the direction of the stock price. At least my loss is capped at .20.

I read an article some time ago (possibly Optionetics) which suggetsed that collars are the way to go and if the UL drops, at exp take the put profit, buy more stock and put the next month's collar on. As long as it drops you keep increasing the size of the position and if it ever pops, you do better than having just held the stock. I don't know how viable this is with a stock $3 away from extinction

If interested, I'll see if I can track it down.

What is surprising though is that the loss on my stock position and the gain on the two option positions are getting more close to that .20 loss area than I would have thought for being two weeks out.

Not surprising at all. When you're a coupla weeks from exp and the UL has moved a strike away from execution price, the options are approaching parity (put ITM, call well OTM). When that occurs, the maximum option gain is near at hand and that means that you're approaching the maximum loss of the collar.


The last couple days I was tempted to sell some of the July $3 strike puts. The stock price had been in the $3.68 range. The bid on the July $3 puts in the .16 range.

Woulda, coulda, shoulda...