Help a noob unwind from a position?

Discussion in 'Options' started by 76132, Dec 1, 2011.

  1. 76132



    I just started trading and did something really stupid, and now I am stuck with 400 shares of something I don't want. I don't want to take a loss outright, and was wondering what some of the pros would do in my situation?

    This is a pretty long post, so if you don't want to read it all, I've bolded the questions I am hoping to get answered.

    - - -

    Here's the situation:

    Cost Basis: $2.23 per share
    Current Price: $1.23 per share

    Strike prices for options are: $2.50, $5.00, and $7.50.
    Expiration dates are: Dec, Jan, April, July

    Low Liquidity in both the underlying and options market.

    - - -

    Possible Method of Unwinding:

    I am considering unwinding 200 shares of my stock at a breakeven point/possible gain/slight loss at the risk of holding 100 shares of my stock hostage. This would be great as that would get rid of half of something I don't want.

    Here are the current strikes and ask prices of the Dec Put.
    K: 2.50; P: 1.40
    K: 5.00; P: 3.90
    K: 7.50; P: 6.40

    As you can see, the time premium for all the Puts are the same, i.e. $0.13, since the underlying is trading at $1.23. If I were to buy one, which one should I buy?

    With something as illiquid as this, would the time premium really decrease as expiration nears? In other words, should I buy it now or wait until it nears expiration?

    My potential strategy is to buy two puts at a total time premium cost of $0.26. And then sell a July call at a strike price of $2.50, which has a bid price of $0.30.

    This would give me a $0.04 net gain on the time premium.

    I would end up holding 100 shares hostage to the July call, since I am trading with a cash account.

    What do you think?

  2. nkhoi

    nkhoi Moderator

    sell half (200 sh) if still not moving sell half (100 sh) etc...
  3. 76132


    Thanks. I'm going to look at the P/L and make my decision. I think I did some math wrong too.
  4. FSU


    Would be helpful if you posted the stock name
  5. Churka


    Ouch, tough spot.

    How did you get into such a position to begin with?
  6. 76132


    I'm trying to get the mod to delete my opening post. A lot of math was wrong - should have calculated it out in excel first.

    My new strategy is to buy 4 Dec 2.50 Puts at 1.40 and sell 4 July 2.50 Puts at 1.55.

    Stock is VRML.
  7. Question: What would a pro trader do?
    Answer: Sell 400 shares.
  8. A pro trader would have done something long before the UL enarly halved in value :)
  9. 76132


    I know I know should have sold earlier. I have a list of 'don't dos' from this trade. But given the current situation...
  10. If you sell 200 shares, buy 2 Dec 2-1/2 puts and sell 1 Jul 2-1/2 puts, you protect against add'l downside loss for 2 weeks and have little to no upside gain until somewhere north of $3. It's dead money. Are you comfortable with that?

    A beter question would be, what are you trying to achieve with the usage of options in this underwater position?
    #10     Dec 1, 2011