Below is a snapshot of the AKS current position on July 02rd 2012 at 4pm. Close price is $5.79.
3 trades were executed on 23rd May 2012 :
Close position : Long 17 AKS Sept 2012 Puts strike $8 : bought $1.72, sold at $2.09 = $629 profit
Buy Stock : Long 300 AKS @6.22 (cost $1866)
Open position : Long 20 AKS July 2012 Puts strike $6 : price is $0.44
2 trades were executed on 6th June 2012 :
Close position : Long 20 AKS July 2012 Puts strike $6 : price is $0.45 – making $17 (gain)
Open position : Long 20 AKS Dec 2012 Puts strike $6 : price is $1.08
Buy to Close position : Short 3 AKS June 2012 Puts strike $6 : price $0.14 – costing $42 to buy back, but making $66 (gain)
Sell to Open position : Short 3 AKS July 2012 Puts strike $6 : price $0.37 – bringing in $111 cash
REALISED GAIN/LOSS *
Closed position : Long 17 AKS Sept 2012 Puts strike $9 : bought $1.79, sold $2.46 = $1136 (gain)
Close position : Long 17 AKS Sept 2012 Puts strike $8 : bought $1.72, sold at $2.09 = $629 (gain)
Close position : Long 20 AKS July 2012 Puts strike $6 : bought $0.44, sold at $0.45 = $17 (gain)
Closed position : Short 3 AKS June 2012 Puts strike $6 : sold $0.36, bought $0.14 = $66 (gain)
Total : $1848 (gain)
(* including commissions)
UNREALISED GAIN/LOSS*
Open position : Long AKS 2000 shares : price is 5.79 = -$3893 (loss on 1700 shares) + -$129 loss on 300 shares) = -4022
Open position : Long 20 AKS Dec 2012 Puts strike $6 : price is $1.14 = +$120 (gain)
Open position : Short 3 AKS July 2012 Puts strike $6 : price is $0.51 = -$42 (loss)
Total : -$3944 (loss)
(* including commissions and assuming worst case option prices)
Total gain / loss : -$2096 or 12.5% (not good)
For comparision “Buy and hold” would be down 28.3%, with no cash on hand.
This means the strategy is currently down 12.5% (not good – but significantly better than buy and hold), however we do have cash ($1848 in realised gains) that was used to buy 300 shares. These shares could be considered “free shares” bought by the realised gain on the put options. The average price is now $7.80 for 2000 shares (was originally $8.08 for 1700 shares).
It is definitely worth noting that the low point for this stock was $4.59 on Jun 12th 2012 – which would have made the “buy and hold” down 43.6% at that point! Having put options allows you hold through crazy times like that and still stay “in” for any bounce. Not that we can predict the future, but there is a fair chance of that being the yearly low (giving the high volume down and back up again). If it isnt the yearly low, we are now hedged beneath $5 (Dec 2012 put $6 strike minus cost of $1.08 = $4.92). That is the absolute worst case scenario assumes that we do nothing all the way to December expiration (obviously we will attempt to rescue some value from this put option nearer the time). See stock chart for trade duration :
http://bit.ly/R5MvJI
With hindsight this position was “over traded” especially with switching from 6 month options (Sept 2012), then near month option (July 2012) then returning to 6 month options again (Dec 2012). The thinking was that the stock would snap back very quickly (maybe up over $8 a share and having about $2 in long term options would be a drag on stock price rally, but having $0.5 in near term put options was worth the binary risk (i.e. near term put options for sell off protection, but dont want them to be dragging on the stock price rally all the way up to $8 is the rally is only a 1 month time frame). In the end the rally did not materialise, and the near term options (July 2012) were bought back for near even money.
With hindsight, holding the $9 Sept 2012 put (and not doing any rolling down puts at all) would probably have made about $2 * 1700 = $3400 hedging (current put value $3.80 minus original $1.79 cost) instead of the $1800 from the various realised hedges above. This type of decision is always a trade off between potential opportunity cost (there after can be a significant counter rally after such a severe selloff) versus what actually happened (it kept selling off). If there had been a big rally during the period, then the rolling down strategy (as above) typically gives better results.
The delta on the current protective put is about 50% (so at the current stock price, for every $1 move we are hedged for 50cents of it – effectively a long exposure of only 50% of the traditional “buy and hold” stock position). However given that this is a long dated put option (at hopefully) near the lows for the year, this can be held for 3 months and re-evaluate the position. If AKS rallies to over $8 then it will have worth staying “in” for any bounce (as the average price is now $7.80).
Dividends for the period were $85. Bizarrely due to the low stock price we now have a yield of 2.5% on our average price of $7.80 (which wasnt the original intention – just a side effect).