In a series of articles posted on April 2, 2012, April 28, 2012 and May 8, 2012 related to SanDisk (SNDK), an initial protected covered call position has been converted to a bull-put credit spread and rolled multiple times. A protected covered call may be entered by selling a call option and using some of the proceeds to purchase a protective put option. 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.
For the most recent bull-put credit spread, a management point of $34.30 was selected for which management of the position should be considered for a stock price below $34.30. SanDisk's stock price (shown below) has breached the $34.30 level, so consideration for managing the position for an exit or roll is given.
An exit of the current bull-put credit spread position will require a net debit of $0.74 (shown below) which is greater than the $0.32 of cumulative credit we have received for the previous bull-put credit spreads.
So an exit of the position would result in a loss of $0.42 per share representing a loss of -14%. There hasn't been any negative news related to SanDisk, so rolling looks like an option to consider. However, with SanDisk scheduled to present at the JPMorgan Technology Conference on Thursday, May 17 at 12:30 p.m., Eastern, rolling the position could be dangerous, as the company might release some bad news, but taking a loss of -14% is also not a good idea, so consideration for rolling the position will be given.
Looking at July, the only position which can be rolled to and receive a net credit is the 2012 July 29/32 bull-put spread as shown below:
While getting the position out of immediate trouble, the new position only has 5.7% of margin between the stock price and the short strike price of the put option, so consideration for further out-in-time is considered.
Unfortunately, options aren't available for SanDisk for August and September, so consideration for October options is given. Looking at October, a couple of positions are available for rolling with a net credit: 2012 Oct 28/31 and 2012 Oct 27/30 as shown below:
Since the 2012 28/31 provides 8.7% of margin between the stock price and the short strike price of the put option and provides an additional net credit of $0.21 ($0.95-$0.74) representing an increase in potential return of 7%, the 2012 Oct 28/31 is selected for rolling.
The additional potential return of 7% from rolling to the new bull-put credit spread increases the cumulative return to 17.9%, including the previous bull-put credit positions. This represents a potential profit of 9.2% over and above the loss sustained on the protected covered call discussed in the first article.
The specific put option to sell is the 2012 October 31 at $2.46 and the put option to purchase is the 2012 October 28 at $1.51. A profit/loss graph for the position, including previous bull-put credit positions, is shown below:
A management price of $32.25 is set for the new position. If the price of the stock drops below $32.25, the position should be managed for exit or roll.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.