deep in the money options newbie ques

Discussion in 'Options' started by trc4949, Oct 31, 2008.

  1. trc4949


    I have some GDX January 20 calls and I am trying to figure out when to close them out.

    If they become deep in the money what do you guys normally do, just keep holding them and letting your profits ride? or do you bail out.

    I have all the way until January.

    The thing is, the more in the money they become then most of the time premium dissapears right? so the option will pretty much be valued point wise value above the strike price.

    I would love to hold these puppies until GDX hits 36, but will it get there before January??????????????
  2. Put in your sell limit order for sure.
  3. Keep in mind that trying to cover a DITM option gets harder as liquidity dries up. Most of the action is ATM, so DITM options are more thinly traded; therefore the bid/ask spread widens on them.

    If it's sufficiently ITM there's almost no time premium left. Taking profit by exercising the option might make sense depending on your broker's fee structure.

    If you're still bullish on the stock, you could always roll up. You'd be taking profit and simultaneously re-positioning yourself for more upside. You just have to be careful that the IV isn't historically high on the option you're buying. That's very likely in today's environment.
  4. dmo


    Nice trade! You have a few options, no pun intended. You can exercise, lock in profits by selling short the stock, or just sell the options.

    You're right that when these calls get deep in the money, they have no time premium left. But they continue to have POTENTIAL time premium. That's why I'm not crazy about early exercising my options.

    If for example the stock hits 36, you could sell short the underlying, locking in a profit of 16 minus whatever you paid for the calls. That way, if the stock suddenly plunged back down to 20, you would make 16 bucks on your short stock AND you'd have the time premium on the now-atm calls.

    If you sell short stock and the stock continues up and your cost of carry becomes greater than the cost of the 20 puts, then you could just buy the 20 puts and exercise the stock. You'd be left with just your long 20 puts. If it's getting close to expiration you could just forget about the 20 puts altogether - or you could probably buy puts at a higher strike for the same price.
  5. With DITM options, there is no 'right' answer.

    At this point is becomes like owning stock.Thus the answer to YOUR question is: Handle this the same way you handle a profit when you trade stocks.

    However, there is an alternative that option trading offers. You can unload your DITM Jan options, taking a nice profit and then reinvest <i>some</i> of the proceeds in another call option - with a higher strike.

    That way, you an still participate in the stock rallies <i>and</i> you will have some cash off the table in case the stock declines.

  6. trc4949


    thanks for the feedback..

    I am gonna try to get out early November.

    What concerns me is that if you look at the options on GDX in January that are deep in the money, you see that there is zero open interest.

    And when I pull up a quote on etrade on them I see that there is zero quantity at bid and zero quantity at ask.

    So that would likely mean if I am still holding onto these puppies when GDX is at 36 I will not be able to get out of my trade because there will be zero quantity bid at that time ?
  7. Take your profits....NOW! There will alway be another trade to start up again once you bank this one.
    When ever the market gives you a profit, take it.
    You should have already set a profit target for when you would exit before you entered the trade.
  8. The Open Interest is not ZERO. You own some options and thus the open interest is as least as many as you own.

    In fact the OI is 1143.

    Check here:

    Tell your broker their data is bogus and to fix it right away.

    You will be able to sell when you want to do so, but you may not like the price. Sometimes DITM options are bid below parity. If that happens to you, exercise your options (during the trading day) and then immediatley sell LONG stock.

  9. I like to roll DITM options to ATM options. It acts as a stop loss.
  10. take profit now... extrinsic value declines the more strikes in the money you go. maximum extrinsic is typically +/- 2 strikes from market.

    If you believe the trend will continue book your profits and enter a new trade otm for maximizing opportunity.

    Of course tax consequences and all things being equal.
    #10     Oct 31, 2008