Another one!

Discussion in 'Options' started by droid17, Nov 22, 2009.

  1. droid17


    Hi all :)

    Just looking at what your thoughts are on this one. Basically creating a ratio spread by selling covered calls instead of selling naked calls. Seems like a good move if you don't think there will be too big of a move, but if it was you would sell your shares for a profit, and be able to get back in with the calls you bought. If it finishes between your long call and short then you can either add more to the position or take the profit right there.


  2. What I can see is that you want to learn more about options, but what you are doing is fining high risk strategies.

    No one should ever consider writing naked calls as a strategy, unless you have a lot of experience trading options and have proven that your risk management skills are excellent. This is one dangerous strategy.

    Buying stock to protect those calls is better than selling calls naked. But now, you not only have the risk of a big move higher, but you will have a loss if the stocks moves significantly lower.

    Is the simple one x one call spread unappealing for any reason?

  3. droid17


    Hi dagnyt,

    No that is fine I am just exploring ideas, reading alot :). What I was thinking is that say I owned a stock that was in the money and I didn't feel was going to make a huge move, but could creep a little higher. Wouldn't be a good strat to sell further OTM covered calls and buy calls around the price of your owned shares?

    If it goes way up, fine you sell the shares for a profit and you can choose to exercise the calls if you want or just sell them. If it doesn't move at all then ok nada. If it moves up some, but doesn't break your short calls then you can add more to the position if you are bullish or sell em for a profit.

    What you think?


  4. u21c3f6


    What happens to your position if the stock price goes down?

  5. droid17


    If it goes down then you are down, but if you just flat out owned the shares you would be down too.
  6. spindr0


    What position has "stock that was in the money" where you could "sell the shares for a profit" and "can choose to exercise the calls if you want or just sell them" ??

    I'd suggest that you consider getting away from long stock CC positions and use ITM calls instead of the stock. You may give up a little on the spread but over time, you'll never have a stock cratering debacle. And on the way down, the decreasing delta of the ITM call will not hurt you as much as the 100 delta loss on the stock.

    And if you're looking for a little extra bang for the buck, consider slightly overwriting... no more than 6:5 or 7:5. If risk averse to naked, instead, sell 1-2 bearish call spreads above your 5 bullish call spreads.
  7. dmo


    Droid, you are doing what beginners do - trying to find some "strategy" or combination of options that is better than other "strategies." Some magic combo that will give you an edge.

    As a learning exercise there's nothing wrong with that. It makes you think about how options work if this happens or that happens, and that's fine.

    But before you become a successful trader, you will come to understand that no strategy is inherently better than any other strategy. No strategy will give you an edge in and of itself. Edge depends on the prices at which you execute.

    It's like asking which is better, rolling dice for money or flipping coins? Inherently, neither has an advantage over the other. But if you can get better than fair odds for the coin toss, that's better than fair odds for the roll of the dice. And vice-versa

    Somebody posted here in the last few days that he can't get the price for a calendar spread that he had been getting, so he'll just keep his hands in his pockets and wait. That's the ticket. Ya gotta understand that it's not the calendar spread that makes it a worthwhile play, it's the price at which you can get it.
  8. droid17


    Ah I see. I should probably try to keep it more simple.

    Hi spin what I meant was say you bought a stock at 6 and sold lets say the 9calls to buy 7calls if the 9s where called away you make 3$ on selling the stock and your up another 2$ on the 7calls which you can exercise or sell.

    Make sense?

    Thanks again!

  9. droid17


    Oh spin btw I am becoming a bigger fan of ITM calls vs straight ownership :)
  10. spindr0


    The problem I'm having with your strategies is that you're proposing them as if you're getting something for nothing... IOW, selling some OTM calls to finance add'l ITM calls. All you're doing is taking a larger position at an increased cost.

    Here's a hypothetical example.

    Suppose I buy 10 Jan 8 calls.

    Now I sell 10 Jan 11 calls and use the proceeds to buy 10 Jan 10 calls (credit covers 1/2 the cost of the 10's).

    Now I sell another 10 Jan 11 calls which covers the other half of the cost of the 10s.

    It appears that the 10 Jan 10 calls were free but in reality, I used the premium received for selling 20 Jan 11 calls. That premium was my profit no matter what happened to the position. By using it to buy more calls, I just increased the position size and risk.

    The order in which you take on the legs of the position does not affect its net cost. Period.

    Sippose instead of buying 10 long Jan 8 calls and 10 long Jan 10 calls as suggested above, I bot 20 long Jan 9 calls, resulting in 20 Jan 9/11 bullish call verticals instead of the previous 3 legged position. Guess what? The net cost and the P&L would be about the same.

    My point is that you're not reinventing the wheel. You're just blending existing strategies to effect a somewhat different risk graph. Nothing is free. No advantage to be had. Buy it all up front or buy it a leg at a time. Same result if price hasn't changed.

    And in your aforementioned example, the question would have been, what do you think of doing a covered call and a bullish vertical on XYZ, not what do you think of buying this to sell that to buy this? etc, etc.

    And FWIW, the synthetic NP would have saved you a leg.
    #10     Nov 23, 2009