Input requested

Discussion in 'Options' started by khorner, Nov 29, 2009.

  1. khorner

    khorner

    History:

    250 TRLG bought @ 22
    250 TRLG bought @ 18
    5 JAN 20 CALL sold @ .90

    Noob thought process:
    The second purchase of TRLG was to cost avg to 20. I expect the call to expire worthless, but if not, I'm happy to be out of the position.

    Best case scenario:
    Stock climbs to just under 21, options expire, I sell.

    My concern is the stock won't rise above 20 by expiration. I don't think this is the best way to turn a looser into a winner.

    What is a better bearish strategy to turn this around should the underlying stay below 20?
     
  2. 1) I know you will find this difficult to accept, but the best advice is to FORGET the price you paid to own the position.

    That means you should get rid of a position you do not want to own, rather than seek a way to 'turn it around.'

    2) Then decide if you want to own the Jan 20 covered call.

    3) Assuming you do not, make a suitable decision and don't pay attention to whether it's a profit or loss.

    Holding onto bad positions just to avoid taking a loss is a disaster of a trading plan.

    4) I suggest any of the following:

    a) exit the trade. A reasonable choice

    b) buy Jan 17.5P to limit losses. This is a very expensive plan. It's better to exit.

    c) Cover Jan 20 calls and write the Dec 17.5 or Jan 17.5C. This gets you some cash, locks in a loss, but if stock closes above 17.5, you will be better off than simply closing now.

    d) Close your eyes and do nothing. This is a very bad choice if you do not want to hold the position.

    Good luck

    Mark
    http://blog.mdwoptions.com
     
  3.  
  4. 1) Trade in multiples of 100 shares, not 50 shares. Odd-lots only reinforce your noobyness.
    2) I do not know the strike price increments for that issue but if anybody suggests doing a "1-by-2 ratio callspread", 2 or 3 times, with the long strike price at 18, and the short-strike price at 19, I'll kill them! :mad:
     
  5. You need to put them on in 1:3 ratios!

    (grinning, ducking and running)
     
  6. ?......now I am doubting my original numbers. Since he's "long" 500 shares, he could consider doing a ratio-callspread with an overwrite of 5 calls, i.e. 1-by-6, 2-by-7, 3-by-8 et. al. in order to generate premium and that can get the shares called away at a lower breakeven than $20/share. Since he started with an odd-lot, he doesn't have an even-multiple of 200 shares, that messes up the 1-by-2 ratio per 100/shares that they told us to use for this "repair", at which point I say, "offset the mess at-the-market". :cool:
     
  7. One can defend a position by overwriting calls above or buying larger numbers of puts as you roll them down but it's all a bad case of breakevenitis. And in the condition of noobyness, overwriting is unhighly so not recommended (unless it's something like a covered call spread, etc.) If they get into trouble just buying some shares, overwriting (which is what we'd do) is a prescription for a bigger disaster. The 1-by-2 repair would work - just that he'd have to factor in an approx. mid strike stock cost.
     
  8. khorner

    khorner

    I guess this is a good example why noobs keep the pros in business!

    Thanks, all, for the input. I'm thinking the best course of action is to take the loss like any other trade and not force a bull position when I'm a bear.

    With that in mind, I'll close the long stock position and let the call ride to 20; giving back the loss on the long and any diff between premium collected and cost to cover (hopefully expires?).

    Since this would create an uncovered call, does the average broker freak on this? Assuming the written call is closed b4 exercise.
     
  9. You should have sold your long stock position and taken the loss to offset profits.

    Using covered calls to fix a bad position is pretty noobish. All you did is limit the upside but kept a big downside.

    Covered calls are a useful tool if used in the right way.
     
  10. NO!!! Do not do that. Close out your call first, then sell your long position.

    OR Mr. Market will immediately receive good news and the stock will jump to 25 while your ass is hanging naked with 5 strike 20's deep ITM. :)
     
    #10     Nov 30, 2009