Rolling Amazon Bullish Spread For Increased Potential Return

In a previous article, posted on January 6, 2012, a bull-put credit spread was considered for Amazon (AMZN). A bull-put credit spread is entered by selling a put option and purchasing another put option further out-of-the-money. The bull-put credit spread trade is entered with a net credit, with the net credit retained as income or profit. In general, the goal is for the options to expire worthless while retaining the initial net credit and any additional credit(s) from rolling as profit.

The specific bull-put credit spread considered in the previous article consisted of selling the 2012 Feb 150 put option at a midpoint price of $1.67 and purchasing the 2012 Feb 135 at a midpoint price of $0.61. The position had an initial net credit of $1.06 ($1.67-$0.61) representing a potential return of 7.7% with a time frame of 43 days for realizing the potential profit.

Since entering the position, Amazon’s stock price has appreciated and the 2012 Feb 135 put option has a midpoint price of $0.13 and the 2012 Feb 150 put option has a midpoint price of $0.43, so the position could be exited for a profit at a net debit of $0.30, or so. The profit for the position is calculated as the current net debit subtracted from the initial net credit, $1.06-$0.30 which equals $0.76, and represents a current profit of 5.4% calculated as the current net profit divided by the initial capital requirement ($0.76*100/($15-$1.06)). With the initial capital requirement being the initial net credit subtracted from the spread differential for the strike prices of the options ($150-$135=$15).

About 2% of potential profit remains in the position and the position is also considerably out-of-the-money at 21%. An investor in the bull-put credit spread at this point might consider rolling the position to a new bull-put credit spread in order to increase the potential return.

Using PowerOptions tools, a position was found for rolling which increases the potential return over the current realized return by 6.4%, decreases the out-of-the-money parameter from 21% to 13% and has the same time frame for realizing the potential profit which is currently at 29 days.

The specific position for rolling may be entered by selling the 2012 Feb 165 put option with midpoint pricing at $1.58 and purchasing the 2012 Feb 150 put option with midpoint pricing at $0.42. The net credit for the new bull-put credit spread position is calculated as $1.16 ($1.58-$0.42). So the total net credit for rolling is calculated as the net debit for closing the existing bull-put credit position of $0.30 subtracted from the net credit for entering the new bull-put credit spread of $1.16, which is $0.86 ($1.16-$0.30). Since midpoint pricing is considered, the trade for rolling should be placed with four-legs and with a net credit of $0.86.

The total potential net credit is now the realized net credit of $0.76 plus the potential net credit of $0.86 or $1.62 representing a net potential return of 11.6%. The profit/loss graph for one contract of the new position, including the realized profit, is shown below:

By rolling the position, the potential return has been increased from 7.7% to 11.6%, although with an in increase in the associated risk. The new position should probably be managed (exited or rolled) if the price of the stock drops to around $180 or below.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.