Rolling Up

Heather Cullen

Heather Cullen

Author
In The Money

Heather Cullen In The Money BLOG Rolling UP

Rolling Up.

I had quite a few queries about my remark last week about results and rolling up. All of you started at different times, with different account values, chose different strikes and expiries and different cash levels so it’s not easy to give a definitive answer about how much extra you would have made. I thought that I would show an example so that you can see how it works.

I know this is not going to be riveting reading, so anytime it gets too heavy just scroll down to The Week Ahead. This isn’t compulsory; just going with the straight ITM method is very profitable on its own – this is just some icing on the cake.

Entering the trade

Let’s assume you have seen the golden cross confirmation on 9th November 2024 and we want to trade SPY, and bought in at the closing price of $433.84.  Assuming that we had an account value of $100k (sticking to nice round numbers) what would you have bought and how would it have performed?

50% / 1% Strategy

Let’s look at the 50% / 1% strategy.

  • 4 SPY strike $217 options at $221.18 each, total $88,471, cash left: $11,529
  • 3 SPYG strike $30 options at $30.84 each, total $9,253, cash left: $2,276
  • $2,276 cash

If you had held these without rolling then then they would be worth $310.42 and $44.47, which including cash would give you a total account value of $139,785.

If you had rolled 3 months into the trade then your account at that time (9 Feb) would have been worth $130,528. With that you could have bought

  • 5 SPY strike $250 options at $256.21 each, total $128,106, cash left: $2,422
  • 0 SPYG options (too expensive so hold cash instead)
  • $2,422 cash

Today they would be worth $277.42 and which including cash would give you a total account value of $141,133 compared with $139,785.

Not an enormous difference at this stage, but you now have 5 SPY options instead of 4, and are better positioned for gains in the future.

60% / 2% Strategy

Let’s look at the 60% strike / 2% time value strategy.

  • 5 SPY strike $260 options at $182.52.18 each, total $91,258, cash left: $8,742
  • 3 SPYG strike $36 options at $25.44 each, total $7,633, cash left: $1,108
  • $1,108 cash

If you had held these without rolling then then they would be worth $272.64 and $39.20, which including cash would give you a total account value of $149,192.

If you had rolled 3 months into the trade, then your account at that time (9 Feb) would have been worth $137,701. With that you could have bought

  • 6 SPY strike $300 options at $211.22 each, total $126,734, cash left: $10,967
  • 3 SPYG strike $42 options at $30.60 each, total $9,181, cash left: $1,786
  • $2,422 cash

Today they would be worth $232.64 and $33.20 and which including cash would give you a total account value of $151,334.

Again, not an enormous difference at this stage, but you now have 6 SPY options instead of 5, and are better positioned for gains in the future.

OTM Options

I addition with the cash left I would have fluttered on OTM options – remember, only flutter with play money, so around $1k in this account size. OTM options have much greater leverage so you can see that they go up a lot, which would add to your account balance.

Here’s a snapshot of some I bought on 11th March, using a spare $10.8k. The strike is $550 which at the time was 7.5% above current, and you can see that less than 3 weeks later it has gone up 35%.

Heather Cullen In The Money BLOG Rolling UP

(Hmm – its not very clear. It says Cost Basis: $10,821.62 and Market Value $14,661.50 so Gain / Loss is $+3,839.88)

I am not suggesting that you base your trading on OTM options – absolutely not! Just showing you how using a very small percentage of your portfolio (definitely less than 1%) then you can boost your account balance. In the examples above, if we had used $1k of our spare cash for OTM options several times over (I mean consecutively) you can see that we could have got even better results.

We all ride the same waves but get very different results.

2024 Versions – discounted weekend.

The discounted prices for the Paperback and hardback is scheduled for this weekend – I will make it 4 days, from Saturday to Tuesday and will post here when this is confirmed by Amazon. I have to confirm the price, but it will be at printing + compulsory Amazon charges, I can run it with no profit, but I can’t run it at a loss!

eBooks should be free from Amazon if you already have a copy. I have made this an update (which should be free), not a new edition (which would not).

I can’t send anyone the updated bits as both books have been completely rewritten and updated. It’s still the ITM we know and love, but in the bull book we now separate the 50% and 60% strike results, and the bear book now covers the most recent bear as well.

So – just watch here, will post when all confirmed.

To the markets

Market-wise, this week was a bit of a ‘meh’ week – up a little, but hardly worth talking of. It was a short week, with the Easter public holiday. On the other hand, there wasn’t a drop, just a bit of consolidation, which is to be expected. let’s check the specifics:

SPY Chart

Last week SPY ended at $521.21. This week it ended at $523.17. SPY is still smack in the middle of its trading channel and I view the small candles as a good sign. It shows a more stable market with no wild swings. Obviously, day traders love volatility, but we don’t. Quite happy to be boring in this situation.

Heather Cullen In The Money BLOG Rolling UP

Entering the trade

The only worrying thing I can see in the chart is how far way the 200 SMA is – currently it is sitting on 460 which is 12% below the current level. If the market goes up then the 200 SMA will also go up; if the market goes sideways, then the 200 SMA will also go up (as the earlier lower values around $430 drop off and are replaced with new values at around $520) just at a slower rate. The worry is, as always, a sudden drop in the market as it is quite a long way to the death cross.

How much should we worry? Peter Lynch (One up on Wall Street) has a great quote”

Heather Cullen In The Money BLOG Rolling UP

So, keeping things in perspective:

It looks as though the latest uptrend is steeper than previous! Should we panic? Think about it; it is going to be steeper as it is not on a logarithmic scale.

That makes no sense? Let me explain.

Hmmm . . . I went down a rabbit hole here, taking snapshots going back to 1901 and got some really interesting graphs.

Then I realized that I had just written around 3 pages, way too much to add into this blog, so I will cover it next week. Let’s come back to today.

SPYG Chart

SPY is now at the bottom of its trading range, and has been going sideways since mid-February. This period of consolidation matches what is happening on QQQ (the Nasdaq ETF) and is not surprising since SPYG has a greater preponderance of technology stocks than SPY.

Heather Cullen In The Money BLOG Rolling UP

How long can consolidation last? I think I did a blog on it some time ago (I really ought to put tags on these posts!) and gave some examples of consolidation periods lasting several months. Consolidation is not necessarily a bad thing; often markets need to take a breather after a big rise, and the tech stocks have certainly had quite a solid rise.

And in perspective. Interesting that it is hesitating on the previous high, which could well turn into resistance.

Heather Cullen In The Money BLOG Rolling UP

QQQ Chart

I have extended the Darvas box to take in the last week; still in consolidation.

Heather Cullen In The Money BLOG Rolling UP

And still in blue sky territory.

Heather Cullen In The Money BLOG Rolling UP

VIX Chart

Heather Cullen In The Money BLOG Rolling UP

ITMeter

Heather Cullen Blog ITMeter

The week ahead . . .

There’s some data coming out shortly, around market open time – and I would say it was good news. Just a guess. Why? Look at the futures:

Heather Cullen In The Money BLOG Rolling UP

They are up a bit, so someone knows something!

Fingers crossed for a great week.

Heather

Questions & Answers

11 thoughts on “Rolling Up”

  1. Hi Heather, I hope you’re well. I follow your blog pretty religiously. I have taken up the strategy and definitely enjoy it as the results are profitable and it is very easy to follow. The ease of the entire strategy is the most important reason that I follow your blog and strategy… besides it being profitable. I know you released the 2024 version of your books. I have read the other versions in the past, which is why I learned about the strategy. I am wondering if there is a way for you to gift your followers, including myself, with the 2024 updates instead of rereading the entire book to dig through to find the specific updates. Not sure if you have that handy but doesn’t hurt to ask. Anyway, thanks very much for the work you’re doing to help all of us traders to keep it simple.

    1. Hi – I would if it was possible – but they are not little updates – both books have been rewritten substantially to incorporate recent circumstances, it is not just adding a chapter here and there.
      The best I can do is reduce the paperback and hardback to cost price, and the eBook to half price (I don’t want to give it away free, becaue then I end up on the free book list and all that entails), so this weekend check in and get it as cheapply as possible.
      Sorry – but the changes are all the way through.
      h

  2. I really like your idea of buying SPY LEAPS and holding until it crosses the 200 MA. Seems like a much better idea than standard advice. I did want to know if a slight tweak would make it better or worse in your view.

    What if someone bought a 2.5 year SPY LEAPS and sold in up years and held for a second year in bad years? Two down years consecutively is pretty rare. Also, holding for > 1 year decreases taxes on returns.

    I went back to 1950 and noted that 90% of the time, this plan either made money by selling annually or holding it one additional year. In the rare occasion it was down two years consecutively, there were a few years it was only slightly down. Then there are the years around the tech bubble and great financial crisis that were just bad years. Those years would have to be rolled.

    I know a 2.5 year LEAPS would increase cost but might be a bit more stable, decrease taxes and/or increase returns over the long run. What are your thoughts on that?

    Thank you for your work and very creative investment insights.

    Kindest,
    Samual

    1. Hi Samual – you may be nto something there – I look forward to your book!~ (seriously, dont write one – they can sell well and still not make money!)
      I don’t like going out that far simply because I have a shorter time horizon – but it sounds like a good idea it you are the patient type!
      Thank you for letting us know – perhaps someone else want sto collaborate with you? If so, please post here.
      h

  3. It seems as though the cover of 2024 is showing but when I open up the book, the 2023 version shows. See below and let me know if there is something I’m doing wrong. Thanks!
    Eli

    1. Damn, ^$#W^$#W^ Amazon!
      I am afraid that I have to use the same custoemr service as you, I have not special rights, and they won’t talk to me about anyone els’e account.
      I have just checked the ‘look inside feature’ and it is showing the 2024 edition (check the copyright page). In anu case I would get onto customer service and tell them that you have the eBook and want the latest update.
      If they re not helpful I am planning to reduce it to half price at the weekend for 3 days so maybe that is a solution?
      SOrry, Amazon drives me nuts!
      h

  4. Thanks for all of your insights. For your example trades in this blog, what premiums are you assuming when you sell options? I.e. 2%/1% to match purchases under the respective strategies, 0% to be conservative, or something else?

    1. Hi Tony
      yes, you have to estimate – I am assuming that as I buy 6 – 12 months out then after 3 months the time value has not deteriorated materially as we are more than 90 days to expiry. As you know the last 30 days are when time decay mainly occurs.
      If less than 90 days to expiry the entire time value is removed.
      Yes, this has the effect of underestimating profits on selling, say, a 30 – 90 days to expiry option – but assumptions have to be made then checked against reality. However, having an algorithm for calulating the time value exactly was not really possible, so the decision was that if you sold within 90 days to expiry then you lost all time value.
      Hope this helps.
      h

  5. Dear Heather,

    I hope that you’re doing well. I wanted to clarify what expiration date you used in your 50%/1% example. I’m assuming it was 12/20/2024. Additionally, when you rolled up your strike price from $260 to $300, did you roll out in terms of expiry date or maintain the original maturity?

    Thanks,
    Ankur

    1. Hi Ankur
      No probably less, June / Spetember. Tthe option prices have to be recreated – the option prices for past times are not listed anywhere, its not part of historical data, but you can use a Black-Scholes calculator and plug in the variables – if you want to check.
      As last november prices aren’t available, I was reconstructing using the parameters: 6 – 9 months to expiry, 50% strike, 1% time value (which may be an over estimate). The time value was also applied on exit (as the rolling was done at 3 months so there were at least 90 days before expiry). I would have rolled out for another 6 – 9 month option – i.e. extend the expiry date for 3 months.
      I hope this helps
      h

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