How to hedge naked call moving near ATM?

Discussion in 'Options' started by a529612, Mar 7, 2007.

  1. I have these open positions:

    Long 2000 CVX stock (cost basis ~$73)
    Short 20 covered CVX Mar 75 call (expiring worthless)


    Short 20 naked CVX Mar 70 call @ .25.

    This position is moving against me and is approaching ATM. How would you hedge this naked position in the event it goes ITM? I'm thinking:

    1) Turn this into CC and let them call away my stock @ 70 and take loss on the stock.

    2) Convert this naked call to a bull spread by buying 20 Mar 65 call (~4.3 debit, .7 max profit if it closes above 70).

    3) Short 20 Mar 70 put and turn it into a short straddle and hope the position will expire within the zone.

    Any suggestions? Thanks!
  2. just21


    Could delta hedge at the strike.
  3. Can you elaborate on this strategy? Thanks!
  4. you're screwed. just cover the 75 strike 'just in case' for .05 and leave the 70 alone. maybe you'll get a selloff. you'll need a broad market one, though, since oil is very bullish right now.
  5. Ditto on covering the 75's. There's no premium left in them. You're not being paid anything to hold them. Don't wait around for that last nickel.
  6. Probably easier to work out what to do if you analyse your very risky position.
    You're short 20 synthetic mar 75 puts AND short 20 mar 70 calls.
    Iow you've got a short strangle and want the stock to expire between 70 and 75, assuming you put the trade on for a significant credit (but I think you've got a guaranteed loss, the only question is how much of a loss?).
    Solution: what is your outlook for the stock? If bullish then buy back the short call or roll it up and out. If bearish then buy back the synthetic short put. If you don't have an idea of where the stock will go then simply close out the entire position and find a better trade.
    As the others have said, if nothing else, buy back the worthless short call which will then leave you with the covered call aka short put. Personally I would close the whole position - it's far too risky for me. Iow limit your damage.
  7. So both Mar calls expired worthless. I'm looking to roll forward to sell Apr 75 CC but it is selling for peanuts right now. The Apr 70 call looks better but I'm not ready to sell the stock for a loss right now in case it gets assigned. Any suggestions on how to generate more income from this long stock position? I want to hold the stock at least till May for the dividend and the start of the driving season. Thanks!

  8. sell 10 jun 75s, and 10 jun 70s. That'll net you a little more premium. Alternatively, you might want to find a stock with narrower strikes so you can better harness your covered call strategy. Otherwise, move on to put selling strategies. Vertical put spreads and calendar spreads (long or short calendars can both work, depending on your angle).

    Or... create a new position, profiting from the fear in the market. Sell the Jun 65 put, buy the Apr (or more ideally May) 65 put. As the price moves up, and/or IV drops, your long month put will lose more than the front month.

    energy is going to do well regardless ... hurricane fear season is approaching, etc. etc. Whole energy complex will likely do well.

    By the way, check out DVN. they are more an NG play, but they have better net positive earnings growth potential exposure, as the deepwater discovery last summer will have more of an impact on their earnings.

    DVN is getting pretty cheap. Can't believe we're at 64... time to buy.

    Another idea -- check out canadian royalty trusts: PGH, PWI, PWE, AAV, etc. Raw commodity play, as well as VERY high dividend to offset principal risk. Downside is priced in already (new law proposal which taxes divvies significantly coming in 4 yrs) - look to chart of Oct 31, 2006 to see.
  9. Sold Apr 70 Call today. I needed some downside protection and plan to trade it on any pullback.
  10. I had a similar situation with a home building stock last summer. Bought it a little early, sold a CC and of course stock went down. I felt it would come back and what I did was a ratio write (after the call had expired.

    sooo what you might do is buy a June 65 or 70 call (equilivant to # shares) then sell twice the number of 70 or 75. You would at least break even or probably do better if called away at 70. I've traded CVX and I'm very bullish on the I wouldn't give up on it. The other thing I've done in the past with CVX is sell the strangle..and thats worked well.

    You might look at selling the 70 straddle..with vols high thats a good play over just the naked call. If called away you've made money on the put. obviously risk is getting put to.
    #10     Mar 20, 2007