Wednesday, December 16, 2009

Shifting strikes on oil--with three days to go before expiration

The nice little bump up in USO today to over 36.85  knocked the remaining time value on my 35 December calls that I sold-to-open yesterday from  0.32 to .04.  Since I'm feeling bullish about oil, I decided to try and harvest some more time value by moving from 35 strike calls to the 37s.  I did this with a debit spread order of 1.54, buying to close the 35 calls (at 1.89) and selling to open the 37 calls (at .35).   I normally don't like to do this sort of a move because I'm investing additional money that will just go away if the price falls before option expiration, but as I said, I'm feeling bullish.

 If I transacted the two operations independently I would be dealing with the spreads of each option. Doing this transaction with a spread order enables me to set the price I will pay to the penny with a single offer.  To set a price I figured out the worst case price from my perspective (ask on 35, bid on 37 = 1.57), and the best case (bid on 35, ask on 37=1.51) and split the difference.   The order took a couple of minutes to fill, so that indicated that I got pretty close to the lowest possible price.  Too high an offer would have filled immediately,  too low wouldn't have filled at all.

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