Rolled on 1/14/08 at 3:53pm
Stock ~ 133.05
Today is approximately 1 week prior to options expiration day, so it is time to roll into Feb. I don't wait until the last week so I can a) get a good fill & b) get better pricing on my roll. The absolute last day you should ever roll for a diagonal is the Tuesday the week of expiration, but I wouldn't recommend waiting that long.
I bought back the Jan 120 & sold the Feb 135 for a debit of $6.05. The Feb 135 had the most extrinsic value (EV). Notice how I get a debit and not a credit on this roll. This is a phenomena called "Delta Inversion." This happens when the stock moves dramatically in Your favor, but the short leg is gaining in value faster than the long leg. My mentor and I are still trying to figure out how this could happen since the stock is going in your direction! I will follow up in the future when we crack this case!
So what happens is you end up with a debit instead of a credit to roll to the next month. This may seem as unusual since you are "paying more" to get to the next month, but what this allows you to do is control more of the stock at a discount. So for $6.05 I get to control an extra $15.00 of the stock (difference of strikes from my Jan 120 to the Feb 135). So I got a discount of 40%on the stock!
I actually wanted to roll on Thursday or Friday of last week, but work got too crazy so I missed the boat. I did notice that I would have only had to pay $4.60 instead of $6.05 had I rolled on Friday instead of Monday of exp. week...interesting example on how crazy pricing can get on the last week of expiration.
So now, my new adjusted cost basis is $19.25 (from Jan) + $6.05 debit= $25.30
My new stop is set to $20.24 (20% loss) = $2,889.10 stop credit
