Today I want to walk through something a lot of you keep asking me about, and it is not a fancy strategy. It is a cleanup. Portfolio consolidation. This is not financial advice. I am not a CPA, and I am not a trading advisor.
Before I show you what I am doing, let me tell you what I am NOT doing, because people confuse the two. I am not running a back ratio here. A back ratio is when you have found what you believe is a perfect market low and you sell out your lower strike calls to buy 4 or 5 of a higher strike, because you are anticipating a huge explosion to the upside. That is an offensive move. That is not this.
What I am showing you today is defensive and simple. Itβs consolidating a portfolio to make life easier and how to ultimately end up with a stronger position. And it starts with understanding one thing that trips up almost every newer trader: the difference between real value and fluff.
Let's say I own a December 2027 300 call, and I keep hearing from so many of you that you are holding options exactly like this. I pull it up and look at it. It is almost all extrinsic value. There is a tiny bit of intrinsic, but the rest is fluff. Your real value is your intrinsic value, the part that is deep in the money. This is the exact concept I teach in the Beginner's Guide, Module 7, intrinsic versus extrinsic value.
So here is the question I want you to sit with. If most of what you paid for an option is fluff, and the trade has moved against you, what do you actually own? And more importantly, what could you do about it
How to spot the fluff
Let's put real numbers on it, because that is the only way this clicks.
Say I own the December 2028 350 call, and I paid for it a while back. There is nothing wrong with that. It could have been a perfectly good trade you placed a year or two ago that is now just a little underwater. But look at what it is made of today. That option is carrying 92 dollars of extrinsic value. Pure fluff.
How do I know my break even? My strike price of 350 plus the 92 I have in it. That is a break even of 442. There is no intrinsic value working for me at all. I am paying for time and hope, not for value. Break even on a long call is always your strike plus your debit, which is exactly what I cover in Course 101.
So the real question becomes, how do I consolidate a portfolio that has moved against me and put myself in a position of empowerment for when I actually want to exercise?
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The consolidation move
Here is the cleanup. I take my fluffy options, the December 2027 300 call and the December 2028 350 calls, all of that extrinsic fluff, and I sell them out. Then I buy something with real value underneath it: three of the December 2028 230 calls.
What is my new break even? 230 plus the 140 of intrinsic value, so 370. Compare that to the 442 I was staring at before. My debit to make this move was 47 dollars, which is 4,700.
Yes, I recognize I now own three options instead of four. That is the trade off, and I will come back to it.
Why I did it: the capital to exercise
Here is the part that really matters, and it is the whole reason I consolidate.
Think about what it costs to actually exercise these. For example, on the old scattered positions, to exercise, you would need roughly 70,000 dollars for two at the 350 level, another 25,000 for the December 2027 250, and 30,000 for the 300. That is about 125,000 dollars spread across a mess of strikes.
On my consolidated position, the three December 2028 230 calls, exercising costs about 69,000 dollars.
That is the empowerment. 125,000 versus 69,000 to control a similar position, all sitting on real intrinsic value instead of fluff, and all lined up on one clean strike in 12/2028. If SpaceX ever bought out Tesla at 500, or Tesla just runs, I am in a position to actually act.
The decision is yours, and it depends on your view
I want to be honest that both trades are good trades. Which one is right depends entirely on where you think the stock goes.
If you believe Tesla is going to 1,000, you want to keep the four options, because more contracts means more upside in a monster move. If you think Tesla might only reach 500, you want the ones that are deeper in the money with more intrinsic value, because they hold up far better. That is the call only you can make.
Personally, I like all my trades sitting on one, two, or three strike prices. I do not want eight option trades floating all over my portfolio. The only place you will see me spread out is with stock, through my pyramid.
How this fits everything else I teach
You have watched me be deliberate about this. When I placed my MSL last April, my trades were all pretty much at the same level. Then on this pullback, you saw me start adding to stock with my pyramid. I did not touch the all time high. I waited for the very first large pullback on Marvell, the gap fill, then added more at 190. Those are stock trades. I am not even touching leverage until we see the 200 SMA. This is the same money management discipline I walked through in MM61.
I do not like having ten different positions in one stock scattered across my portfolio. It is simply too much to track. So this is really about opening your eyes to consolidation as a tool.
And one last note. Everyone has their own reason for doing this. For some of you it is a tax reason. You might be underwater on two or three of these positions, and there can be a way to maneuver your taxes a bit. I am not a CPA, and this is not tax advice, but we all use this kind of concept for different reasons.