In an initial article related to SanDisk (NASDAQ:SNDK) posted on April 2, 2012 a protected covered call position was examined for SanDisk, after which the stock took a hit, and the protected covered call also took a hit. A protected covered call may be entered by selling a call option and using some of the proceeds to purchase a protective put option. The protected covered call was not hit as bad as the stock, since the protected covered call position was protected by a put option.
In a follow-on article posted on April 28, 2012, a strategy was outlined for recovering the loss using a bull-put credit spread. A bull-put credit spread may be entered for a net credit by selling one put option and purchasing a second put option further out-of-the-money with the goal of the options expiring worthless and the initial net credit retained as profit.
In the second article, a management point of $35.50 was selected for the bull-put credit spread, which has been breached with the current price of SanDisk's stock around $35.30 as shown below:
Based on breaching the $35.50 management point, the position should either be closed or rolled.
Since there hasn't been any negative news related to SanDisk recently, and the dip in the company's stock price appears to be more in sympathy to the recent market dip, consideration for rolling the bull-put credit spread to a new bull-put credit spread will be given.
Using PowerOptions tools, the current 2012 May 31/34 bull-put spread may be exited for a net debit of $0.31 as shown below:
When rolling it is best to roll for a net credit, so a position with a net credit of greater then $0.31 is needed in order to increase the potential return of the position. Looking out further in time, a 2012 Jun 30/33 bull-put credit spread is going for a net credit of $0.51 as shown below:
Based on this, the 2012 May 31/34 bull-put spread can be rolled to a 2012 Jun 30/33 bull-put credit spread for a net credit of $0.20 ($0.51-$0.31) which represents an increase in potential return of 6.7%. The additional potential return of 6.7% for rolling to the new position plus the 4.2% for the initial position puts the total potential return at 10.9% which is greater than the 8.7% loss sustained for the protective covered call position considered in the first article.
So, if the options for the new position expire worthless in June, this recovers the loss for the protective covered call, plus allows for a profit of about 2.1% (10.9%-8.7%). A profit/loss graph for the new bull-put credit spread, including the previous bull-put credit spread, is shown below:
A new management point for the new bull-put credit spread is set for $34.30, so if the price of the stock drops below $34.30, the position should be managed for an exit or roll.