using options to recover from a big move against me when buy a stock for shareholder benefits - RCL attempt to repair position
Shareholder Benefits
Owning shares of a company can entitle you to special benefits when consuming products or services. For example, Royal Caribbean Cruises (RCL) provides $100 onboard credit per Stateroom on Sailings of 6-13 nights. With an upcoming cruise booked and most of my portfolio in cash, I decided to take advantage of this offer. I've done a few cruises in the past and definitely enjoyed Royal Caribbean, especially having young children; and can imagine I will take more cruises with them in the future.
The Purchase of Shares
I didn't do any deep Fundamental or Technical Analysis, but looked at a 5 year chart seeing the stock priced at $135 before the COVID-19 pandemic, and during the pandemic reached a low of around $24. When I purchased the shares it was $40 and dropped in price for the 2 preceding days. Since I bought at the end of the day, I figured I would sell a call option (overwrite) the next day as the volatility was high around 85%. Unfortunately, I got unlucky as the next day a Wall St Analyst at Morgan Stanley downgraded Carnival Cruises (CCL) making the whole sector get repriced down. With an 85% volatility it is expected to move down, but it moved down over 10% (a 2 standard deviation move!) giving me an opportunity to add more risk.
Option Structure to help recoup loses
With the big move down, volatility also moved up 10% points, closer to 95%.
My First reaction was to buy more shares and dollar cost average. The issue with this, is that it would require a lot more capital (almost doubling my commitment) and didn't really take advantage in the spike in volatility.
My Second thought was to do as I originally planned and sell a Call Option against it. I originally wanted to sell the 45 Call in August for around $2.50, but now had to sell the 40 Call for that same price. This was a first good step. But if the stock rallied a lot and I got called away on the position, I would have only made $2.5 or about 6.25%.
So to enhance that scenario, I decided to also sell at the 35 25 Put Spread for an additional $3. This would mean I would need to put up $1,000 in capital (instead of another $3,600 for additional shares) but if the stock recovered and got called away, I would now make $5.50 or 13.75% on the upside; however on the downside, I would lose additional money below $29.50 ($35 Short Strike - $5.50), but wouldn't lose any more below $25 (as my long strike would protect, but still lose on my original stock position).
If the stock stays above $29.50 at August Expiry I will have reduced the cost basis of my stock up to $5.50 (depending how far away my options are from the stock price).
Risk of Structure of adding these options
On the bearish side, I could lose up to an additional $1,000 if the stock is less than $29.50 and on the bullish side, I won't participate in any gains above $45.50.
Disclaimers - I may not hold to maturity, I'm not your financial adviser, please take this as educational information. The reason I could get such a large premium is that this stock has a very high implied volatility ( around 85% whereas something like the S&P 500, SPY, has only about 28% volatility). Let's see how this goes and hopefully I didn't just add additional losses.
Takeaway
Can get unlucky with moves against me, but with high implied volatility I can try to use option strategies to engineer favorably skewed risk to reward trades that match my assumptions and hopefully capture some some yield.
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