LEH naked jan call, need advise on exiting

Discussion in 'Options' started by newguy05, Dec 26, 2007.

  1. This was one of my first option trades bought during the start of the subprime mess. Due to my lack of experience on options at the time and pure stupidity (averaging down at the wrong time, on business trip didnt monitor the market etc..), i am still holding the bag on this naked long call.

    Need advise on how to exit as the expiration date is approaching.

    1) 40 contract of .LESAL LEH JAN 2008 60 Call.
    2) Cost basis: $9.8 Today's closing: $6.4 P&L: -$13000ish

    3) I feel this stock may make another run before expiration to $8+ on the call as jan is usually a good month for lehman. But with the expiration 3 weeks away, i am not too sure if it's wise to still hold on to it any longer.

    Looking for some advise, what would you do if you are in this situation right now? Thanks
  2. bt116


    you're first option trade and you threw down $40k on a hunch with no stop loss? I would say at this point you eat some crow and sell it here. at this point you have slightly better than a 50/50 chance of getting out of this thing with a 50% loss ($65 call is .55 delta currently). those odds seem good to you? if they do, at least cut down the position and lock that 50% loser in now and let the rest ride.

    i could see staying in if you had something better than "lehman is usually good in january" but that sounds like some poop to me. why you're still in this thing is beyond me but you'll be happier with a 33% loss than a 50% loss, and if you're not at least take that much off the table so you don't end up losing the whole thing!

    i wish i was in a position to take a $40k bet on a whim and let it ride! i don't buy or sell naked outright options.
  3. 1 strike? 2 strikes? 3 strikes? 4 strikes?

    I don't see any need to panic at this time, I would hold on. The 1 year chart looks good for long calls.

    LEH 1 year chart
  4. I'd sell half, let the other half ride.
    This closed at 65.45 on Nov 10, and 65.65 on Dec 10 and Dec 24.
    So that's resistance, and it's very close to that as I write this. If it breaks that level, it could easily get to your breakeven level and beyond with breathtaking speed. But of course if the market breaks again, I don't see any reason why this won't crack with everything else.
    Ultimate support seems to settle around 57-58, which would wipe out your position.
  5. thanks, i am going to unload half and short the 70 call on the other half and wait a little longer.

    bt116, it wasnt on a "hunch". Leh had very strong resistence around 70 for a long time, so when it dipped to that level again around july, was so sure it's going to bounce back i bought naked ditm calls instead of using my usual strategy (discussed in dr samir elias' book)

    Of course murphy's law, the whole subprime blew up right aftewards while i was away. On top of that made some stupid mistakes along the way.

    All in all, ~$15k loss for some harsh lessons. Lesson learned and looking to move on.
  6. You completely misunderstood my question. You suggested selling OTM strangles without mentioning how many strikes OTM, which is important.
  7. Don't sell strangles. If you can't make a case for the straddle then go with a long fly. Forecast direction > vol > duration; in that order.
  8. I would just get out nice and clean and take it as a lesson. Don't let the loss ride out of control. Don't even think about repairing the position with exotic strategies unless you know what you are doing. Most likely you'll just make the situation worse and compound your loss.

    Paul Tudor Jones: "If you have a losing position that is making you uncomfortable, the solution is very simple: Get out, because you can always get back in. There is nothing better than a fresh start."

    "Never play macho man with the market."

  9. HOBO


    Dependent on your tax situation, you might want to consider tax-loss selling.
    Dec 28, is your last chance to close the position and settle in 2007 year. (US options settle in T+1). If within 30 days, you open another position on the same underlying, it might be considered a “wash sale”.
  10. are you kidding? not even close. I be happy just to have 1/10th of the knowledge and insight Atticus does.
    #10     Dec 28, 2007