In a series of articles related to Akamai (NASDAQ:AKAM) posted on April, 27, 2012, May 8, 2012 and May 14, 2012, a bull-put credit has been considered for the company. A bull-put credit spread may be entered 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 a profit.
In the most recent article, a management point of $29.25 was set for the 2012 Nov 25/28 bull-put credit spread which has been breached as shown below:
Since the management point has been breached, an investigation into exiting or rolling the position will be considered. Closing the current position will require a net debit of $1.24 as shown below:
Since the $1.24 is greater than the cumulative net credit of $0.54 that we have received so far, a loss of $0.70 per share will be realized which represents a loss of -23%. So, closing at this point doesn't look too attractive, so consideration for rolling will be considered.
The current November spread is about six months out, which is about as far out as can typically be rolled for a net credit for the same amount of capital at risk. And, looking at rolling to January 2013, this can be observed, as the 2013 Jan 24/27 has bull-put credit spread has a net credit of $1.18 (shown below) which is less than the $1.24 debit required for exiting the position. A roll could be executed and the end results could be still be a positive return, but the return would be reduced.
At this point, increasing the amount of capital is considered which highlights the point that spread traders should always have some capital available to rescue a position or have a position or positions which can be closed in order to free up capital for rescuing a position.
The current spread between the option is $3, so we will investigate increasing the spread to $5 which is an increase in the amount of capital by 67%. Looking at November with a $5 spread reveals the position can be rolled to a 2012 Nov 21/26 bull-put spread for a net credit of $1.53 as shown below:
(Click to enlarge)The 2012 Nov 22/27 bull-put spread could also be rolled too, but since November expiration is so far out in time, the additional margin between the short strike and the stock price provided by the 2012 Nov 21/26 is preferable. Another reason for selecting the 2012 Nov 21/26 is the stock has previous support in the $26 range as shown in the chart at the top.
Executing the roll provides a net credit of $0.29 ($1.53-$1.24) resulting in an aggregate potential return of 17% which is slightly less than the 19.6% potential return of the previous position. It's nice to roll for increased potential return, but sometimes it's better to get out of danger instead. Also, the reduction in potential return is OK as it provides additional margin between the short strike and the stock price, but doesn't increase the time required for the position.
A new management point of $27 is set for the new position. If the price of the stock drops below $27, then the position should be managed for an exit or a roll.