Today on Know Your Options, Liz & Jenny read one more email that ties into the segment. The writer asks how they can manage a deep ITM short put that has no extrinsic value, but they are still bullish on the underlying. Liz and Jenny use Pandora as an example to show the viewer how they would do it! They also manage their GPRO position from yesterday's earnings.

Jenny: Hi, everyone! Welcome back to The Liz & Jenny Show. This is "Know Your Options." We had one FAQ that we didn't get to, which will tie into our "Know Your Options" today. Can we pull that up and then we'll get into our "Know your Options Segment"?
Jenny: Perfect.
Liz: How do you manage an in the money short put that has no extrinsic value left, that is deep underwater, when I am still bullish on the product?
Jenny: Okay, a short in the money put. You sold the put, the product went down, and that's what being deep underwater means. You sold the put, the product went down, deep underwater. It has no extrinsic value left. How do you manage it if you're still bullish? This happened in … I don't know that I'd say we're bullish in Pandora, but we have our Pandora earnings trade, which we're in the situation, and we have GoPro.
Liz: Right, both had naked puts in them, so both hit this scenario. I guess we'll have to decide on the bottom whether we're still bullish on both of them, but both have in the money puts now that were out of the money when we sold them.
Jenny: Yeah, and if there's no extrinsic value left we have to do something with them. Let's talk about this. Well, here, we can go right to … let's go to Panera. Pandora. I kept calling it Panera yesterday when I was…
Liz: I think you're doing that because of me. I kept calling it Panera the other day (laughs).
Jenny: I was at this trivia night last week, and one of the questions was: What bread company's motto is "Mother's Bread"?
Liz: Did you say Pandora? (Laughter)
Jenny: No, I think I said Dolly Madison or something like that, or Sara Lee. It was Panera.
Liz: It was Panera?
Jenny: It was Panera, and we got that wrong (laughs).
Liz: Good to know.
Jenny: Anyway, here we had … here's Pandora. We sold a jade lizard. We got a call spread and a short put. You can see right here, here's Pandora trading 1520 and our break-even was 16.
Liz: So we have the 17 put, so technically by all senses of the word this has 14 days left and we have the 17 put. So, this is trading at, if this was expiration, this would be $1.78 in the money.
Jenny: Yeah, we can go over to right here. Sweep out the fabric, so we got that 17 put, and when you talk about no extrinsic value left, there's only 14 cents left in 14 days. That's a penny a day. I don't think I'm going to hold on to that for 14, for a penny a day.
Liz: What Jenny quickly assessed is … and you know it's interesting, because this isn't going to give you … this is a lower priced product and it's even lower now, so at the end of the day you're not going to get that much more extrin …I mean you'll get more extrinsic value than this, but you've got to kind of compare percentage to percentage. What she quickly did is look at the calls and say, "Okay, 15 cents is what's left to get in this option." When we say, "left to get," we know we're directionally wrong.
Jenny: Right.
Liz: If time were to come out of it and it expired right here we would get an additional 15 cents.
Jenny: 15 cents, so if we're down $100 and everyone … slightly less, because our breakeven was 16.
Liz: Sixteen.
Jenny: If we're down, in the end if it expired right here, we'd be down $70. We're not going to just sit for 14 days and wait. We're gong to do something with this.
Liz: Right.
Jenny: There's not much extrinsic value left in our short, and we want to continue to reduce our cost basis.
Liz: So, typically, with this … and this only has 14 days left. Typically with naked options, one naked option, there's no real time as there is with the … to find risk spreads to roll, so we look at the extrinsic value and when that runs out then it's time to get some action.
Jenny: Right, time to take some action. So, when we buy that 17 back we'd be rolling it out to March. When we look at rolling it out to March, we want to try to get some extrinsic value. We have the 17 line, but if you look at that 16 line there's 75 cents in extrinsic value in that 16 line. We could roll to the 17 line and collect a little bit, but I don't mind rolling to the 16 line.
Liz: Well, you know we've collected…
Jenny: We know our breakeven is 16.
Liz: We know our breakeven is 16, so we know by collecting more we'd be fine because it's all together now. Now we understand what our breakeven is and we're reducing our cost basis in it. When you look at this, even just rolling to the 17, you'd be more bullish if you rolled in the 17, but collecting as much as you can, there's still a lot in this 17 dollar product.
Jenny: Oh, yeah, so we…
Liz: And the additional 30 cents.
Jenny: So we roll in the 17…
Liz: I would roll down to the 16, but I mean just to compare apples to apples, if somebody wanted to roll out to that strike, 30 cents is better than … you're getting an additional 15 cents on a 15 dollar product.
Jenny: I want people to see that if we roll to the 16 we're going to pay a little bit. If our original break-even was 16, now we're paying 40 cents. It's going to make our break-even 1640.
Liz: But …
Jenny: Oh, but no, now we have the 16…
Liz: We've got 60 cents.
Jenny: Our original break-even was 16, but now we're rolling to the 16 put. We're getting a … so here we're getting a dollar better strike, but we're paying 40 cents to do it, so we're getting 60 cents, so our break-even won't be 16, it's going to be 1540.
Liz: You get 60 cents because that dollar.
Jenny: Yeah, I mean … I think that's why people get … why people think this is hard.
Liz: It depends, because I look at that and go, "Wait a minute." (Laughs)
Jenny: And so…
Liz: But yeah, when you're rolling down you're getting the dollar. What you're getting is you're getting the difference between 16 and 17. You're paying 40 cents to do it, so you're getting 60 cents. If it was 16 it's now 1540.
Jenny: As far as keeping things simple, if you have a short put that's In The Money, you could roll it out in time. You could better choose a different strike that has a more extrinsic value. You can keep the same strike if you're really bullish keep the same stripe. If you want some more extrinsic value choose a different stripe and get more extrinsic value. I know people don't want to get whip side. Do you want to explain what whip sod is?
Liz: If you are to move down too far you can roll yourself into a pickle where you are making no money if it does come in your direction. If you are bullish you can actually get hurt if the product moves, moves up.
Jenny: Right, and so we don't want that to happen, and also when adding on a call … let's say … because that's what we'll do in this situation. We don't have any announcement coming up. We don't have earnings. We'll add on a call in here … and if we're …
Liz: No, do. Roll the 16, then add 16 and 17 call spread.
Jenny: Add the 17 call spread. Oh, add the 16, 17. I see what you mean.
Liz: You can take in another 30 cents.
Jenny: When she said "call spread" then it doesn't matter, we won't get whip side.
Liz: Then you can't get whip side.
Jenny: So, we'd be buying back our 17 put in February, going out to March and selling that 16 put that we're paying 38 cents for, but if we add on that 16 call, the 16, 17 call spread, then we're doing this and it's not really costing us anything.
Liz: Then our breakeven goes down to 15 because…
Jenny: We've got…
Liz: Because we still have the dollar.
Jenny: Because we bettered our stripe by a dollar.
Liz: Look at that (laughs). It traded 1533.
Jenny: So we've bettered our strike by a dollar.
Liz: We don't make any money if it runs out, but we don't lose any money.
Jenny: Mm-hmm (affirmative). Here's the way that we're moving. We had collected a dollar credit. We had collected a dollar credit and now we're not paying it. Well, here it's a small debit, just a six-cent debit, now it's an eight-cent debit, but we're paying a small…
Liz: It's a negative debit.
Jenny: Oh yeah, so it might be a small credit. For very not much value one way or the other, we're moving this trade to a better strike, adding on a call spread and we still have that dollar credit we received.
Liz: Right, and so in this particular example we still have our jade lizard on, so if this thing shoots back up $3 we don't lose anything. We don't get whip side, per se.
Jenny: Yeah.
Liz: But, we won't make any money except for the little over the dollar that we collect.
Jenny: If it ends at 16 then we make that whole dollar.
Liz: But look what we did. Look what we did. Pandora's … what was it expected move? A dollar?
Jenny: It was $2 expected to move, and it moved four.
Liz: It moved four, so…
Jenny: And now it's up a little bit.
Liz: We can usually get our breakeven on this trade under where it's trading right now.
Jenny: So if we send this it's not going to tell us anything.
Liz: It's not going to tell us anything.
Jenny: Oh, but we are collecting a little bit of money. We are collecting a little bit, so we collected a dollar and now we're collecting a little more. I know this is what we'll do with Pandora. I don't want this to confuse anybody, and I'm afraid it will. Just to simplify things, you've got an in the money put, you can just roll that put. You can roll that put and add on a call, or you can get assigned to take the stop and sell a call against it.
Liz: It's so funny. I'm not laughing at you, because I understand, I speak your language, but you're like, "Just if, to put that sentence somewhere, just to simplify things," (laughs) and then I'm sure what everybody hears is "womp, womp, womp, womp," but it's true. The language is the biggest barrier. That makes what you did simplify it for me (laughs).
Jenny: You know, especially when you're just learning. I know we've got lots of you viewers who are brand new and just learning … and it is, it's tricky to break that language barrier, but after a few months of listening to us you'll be able to follow along.
Liz: We just rolled our, we rolled our jade lizard out in time to bring, to take in some extra DTE, collect some more extrinsic value and brought it back together and we created a big lizard.
Jenny: So here's what we have now.
Liz: Are we filled?
Jenny: Here's what we have. We still have the call spread in Feb until it expires. Oh, you know what, that's not going to expire for 15 days.
Liz: You should close out that. Or, just close the short.
Jenny: Yeah, just close the short because it's just three cents. Although I'm at, oh yeah… so we're going to, what we're left … so what we're left with, we don't have to worry about that 21 long but what we're left with here is this new March position. Short the 16 call, short the 16 put, and long the 17 call, and we've collected a little over a dollar for this position. It's not ideal by any stretch. We could just sell that call and not buy that 17 call. We could have it on the 16 straddle which might reap us more money, but then the risk is Pandora running up.
Liz: This is what I'm going to do to my position. Some people might just sell the call, but you know what, this is what I'm going to do to mine.
Jenny: You know what, you could take the stock. You can get assigned on the stack and then sell a call against your stock.
Liz: Pandora's a low enough priced product that you can take the stock.
Jenny: But that's the same thing as rolling the put. You can roll the put and roll the 16 put and the 17 put. Either one. Taking the stock and then selling out the 16 call against your stock is the same thing as rolling your put to the 16 put.
Liz: It is, for sure.
Jenny: So, there's lots you can do. I know people say they … I know we have a lot of emails about not getting whip sod. A product that's down significantly, but they still want to reduce their cost basis, and then I would say … you know, if you don't want to sell calls and have it run through your call, then sell call spreads.
Liz: That's what we did here. Essentially, that's what we did. Essentially we took the stock and sold the call spread against it.
Jenny: Yeah.
Liz: Just synthetics. When we understand the synthetics and the components, that's what we did, and we used less capital because that put is 1/4 of the capital versus 1/2.
Jenny: Yeah. Right, so, okay. So that's Pandora.
Liz: If you can do GoPro in under 30 seconds (laughs). I'm just kidding.
Jenny: Well, GoPro is super easy. GoPro is just closing it. We never get filled on our stocks, so to define our upside risk we bought a call. We collected $4 on that strangle, bought a call so we only collected $3. GoPro is trading almost 49. And, so, this in itself is an almost $160 winner. Our stock position was a loser, but then this helped offset it. This helped offset - I did one strangle for every 100 shares of stock, and that helped offset my stock loss.
Liz: It almost offset it one to one, because we collected so much.
Jenny: Four dollars.
Liz: We didn't have to buy that.
Jenny: Yeah.
Liz: It only moved down … it's now down 480 or something like that? What's it down now?
Jenny: We made $400 on the strangle, and the stock is down 550, so we made 400 on the strangle, lost 550 on the stock, so we're out 150 per one in GoPro, but now we're out of that strangle. We still have the stack, and we sold a March call against it.
Liz: Right, and that's typically what we will do. We've talked about that before. The good thing about GoPro, I know that GoPro is hard to borrow, which means that it's difficult to short the stock or there's not enough stock out there to short, but there's a lot of premium in these options.
Jenny: Yeah.
Liz: As much as I know some people … I do like GoPro because it has been good to me and it does move. I find this to move a lot. I have sold a call against it, and I mean you can collect another $3 on this.
Jenny: You talk about reducing your cost basis. You can get a decent amount of premium in these calls.
Liz: That's just it is that I find myself getting [inaudible 00:12:30] this product.
Jenny: All right, we're out of time.
Liz: Oh, we are?
Jenny: Yeah.
Liz: I was trying to…
Jenny: We've been out of time. All right, we're going to take a break and we'll be back with Trade Small Trade Off.
Liz: Stay tuned.