More Rolling For SanDisk

| About: Western Digital (WDC)

In a continuing series of articles related to SanDisk (SNDK) posted on April, 2, 2012, April 28, 2012, May 8, 2012 and May 16, 2012, an initial married put position was closed after getting into trouble, but not too much trouble, as the married put position has limited downside and unlimited upside. A married put position may be entered by purchasing a put option against a stock in order to protect the stock in case the stock price drops significantly.

The married put position was closed and replaced with a bull-put credit spread in order to recover from the loss on the married put. 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. The stock price of SanDisk has continued to drop, and the bull-put credit spread position has continued to be rolled in response.

In the most recent article, the bull-put credit spread was rolled to a 2012 Oct 28/31 put spread. A management price for the position was set for $32.25. The price of SanDisk's stock has breached the management point, so consideration for exiting or rolling the position is given.

To exit the current 2012 Oct 28/31 put spread will require a net debit of $1.22 as shown below:

(Click to enlarge)

The aggregate amount of credit received so far from the series of bull-put credit positions is $0.53 which is less than $1.22, so to close the current position would result in a loss of $0.69 which represents a loss of about - 23%. Closing the current position is not very attractive, so consideration for rolling the position is given.

Rolling at this point is still an attractive idea, as the current stock price is near the last major support level for the company as shown below:

(Click to enlarge)

Additionally, in SanDisk's presentation at the JPMorgan TMT Conference held on May 17, 2012, the company had good things to say about new initiatives being worked on which should be positive for the company in the coming months. As an example, the company is working on a multi-chip device which contains flash memory and dynamic memory which should be attractive for some of the company's large OEM customers.

Additionally, the majority of the company's products will transition to 19nm by the end of the year which should give SanDisk a competitive advantage related to price as compared to many of its competitors.

Based on this, rolling is a viable strategy. However, there aren't any stock options available for SanDisk for November or December, and there isn't an available option to roll to for 2012 Jan either. Typically, there's not much to roll to more than six months out in the future.

In light of this, consideration will be given for adding additional capital in order to rescue the position. Spread traders should always keep a reserve of capital or positions which can be closed in order to rescue a position.

Using PowerOptions tools, it is observed that the 2012 Oct 24/29 put spread can be entered for a net credit of $1.48 as shown below:

(Click to enlarge)

The 2012 Oct 25/30 put spread is also a viable candidate, as it can be entered for a net credit of $1.64, however, the margin between the stock price and the short strike of the put option is 5.2% whereas the 2012 Oct 24/29's margin is 8.4%.

Rolling from the 2012 Oct 28/31 to the 2012 Oct 25/29 represents an increase in the capital requirement of 67%. The net credit from performing the roll is $0.24 ($1.48-$1.22) which results in a total net credit for the series of bull-put credit spreads of $0.77, representing a potential return of 16% which is inline with the 17.9% potential return of the previous position, yet has an increased margin between the stock price and the strike price of the short put option, putting the investment in a safer position, albeit with more capital at risk.

A new management point is set for the new position of $30.25. If the price of the stock drops below $30.25, the position should be managed for an exit or a roll.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.