The size of the trade is relevant for the advice that a newbie should not start with 40 contracts and $40k in a position when they are new. If they have a $4,000,000 account it still makes no sense to do that and one cannot say well a $40k is nothing to this person. Anyone who takes a $40k hit recklessly and without caring is someone will can turn a $4 million account into a $40,000 account. It is representative of risk and trade management. I never met a successful trader who would go big into a new area of investing without knowledge and not care if they lost it all, at least not one with good risk management. And it is not the size we are grinding out here in the minutae (sp) but what is behind it.
I disagree. This is the option strategy forum, not the risk management forum. The man didn't open a $40,000 position, he got there by averaging down and now he comes to this forum looking for INTELLIGENT advice on strategies for dealing with this situation and he's told to take the loss and gets a lecture on risk management. Plus now he's sitting on 10 naked calls because that's easier to manage??? Where's the management ??? There were a number of damage control strategies that could have been recommended that would have at least given him some useful knowledge on for his $ with the potential to trade out of this with a profit. If nothing else, I think he could have rolled out his calls and set up a delta neutral position either shorting the stock or setting up a synthetic short position. As for risk management, let's say he is an experienced stock trader sitting on a 4 million dollar account and he put 10% of his account into this trade( $400,000 worth of stock) with a protective stop at 10% . He would only be risking 1% ($40,000) of his account on this trade. Most people would call that proper risk management, even though he is risking the same amount of $ as he is on these 40 calls.
LEH has been showing some strength in a weak market, the next few weeks will be interesting and I'm sure this thread will come back to life at expiry time (Jan 18, 2008).
You make a good point although I still think someone with $4 million throwing $40,000 into options without any knowledge is still reckless in theory and you cannot defend a position simply because the full loss would be a drop in the bucket. As for the current position I do not think he is naked 10 calls as that would truly be reckless. I think he is now long 10 bull call spreads with a chance to make some money if LEH gets to $70 by expiration (do not know the actual expiration breakeven). However the key underlying fact is that when you go long options and the stock drops, there is no magic adjustment to turn a loser into a winner otherwise where would the risk be. The underlying stock still has to cooperate by moving in the expected direction. So it is not as easy as simply telling the person to do X or Y and the position is fixed or cured. A lot of it depends on where the stock is at the time and where the person now expects it to move to by expiration. To follow your advice we can work back from the original position and suggest some adjustments based on diferent expectations of where the stock will move to in the near future or at least by expiration. But you have to admit, that if the OP does not know about options andis a newbie then explaining adjustments will not help the situation because they still are not learning the basics of option pricing, time decay, volatility, and the Greeks which are needed to understand how to put on a good option position and even more so how to understand the potential adjustments. So before explaining adjustmetns I stil advise the newbie take some time to work on the basics and understand options with access to a lot of helpful people here to learn how to better use options for trading and investing and even for possible adjustments. But we cannot gloss over the lack of knowledge and simply provide a band aid for the current positions. You know the whole give a man a fish or teach him to fish analogy. I would rather he learned to fish then was simply told where to get the one fish for now which will save him way more money in the future and even make him some money if he learns the proper b asics. Happy new year..
Original position: Long 40 LEH Jan 2008 60 calls @ $9.80 -------------------------- Adjustment: Sell 30 LEH Jan 2008 60 calls @ $6.20 Sell 10 LEH Jan 2008 70 calls @ $0.45* -------------------------- Current position: Long 10 LEH Jan 2008 60 calls @ $9.80 Short 10 LEH Jan 2008 70 calls @ $0.45* -------------------------- *my estimate price, not 100% sure.
i do understand the theories, greeks, etc about options... what i lack is enough experience to apply them properly. So was hoping this thread would offer some real how-to so speak to do adjustments and reduce risk based on what i had - 40 losing positions of naked calls. Anyway i think it accomplished that, with comical performance by mr booster in the middle. So thanks all, will post once i close the the last 10 contract of this bad boy out. You got it forex, thanks
new guy, making a plan at the beginning (as mentioned earlier) is the best way and throwing out an idea at its inception will often elicit comments giving you ideas on (potential) adjustments or better ways to structure a trade. In perfect 20/20 hindsight buying/selling naked calls/puts is never the best strategy. If I do go naked I try to cover up as soon as possible...within days. I'm almost always screwed if I don't One of the best tid bits I keep at the top of my brain is "a spread is NEVER the worst position." Unless you haven't a clue where the "top" might be in a stock you need to do a spread either vertical or horizontal to minimize your risk, even if it reduces your gain. Most people think options are an all or nothing game, there is more opportunity to take partial gains than people realize. GL on this and your next trades!
I don't think trading naked options is a bad thing. Usually on a vertical spread you've got about a 1:1 risk ratio ( risk $125 for every $125 potential gain). I don't think that is a very good ratio. I have vertical spreads out now on GWK2 that I legged in so I made $50 on each position and will make an additional $500 at expiration this month. But I'm also leaving over $1500 / long call on the table. In reviewing trades from the last 5 years, I would have always been better going naked with a smaller position that had the same potential loss. Almost without fail, on calendar spreads my short calls have expired ITM and I then had to close the spread with a minimal gain or let the longs run and risk them going OTM. That wouldn't bother me if they had been naked calls to begin with, but taking a loss on the short calls and then a loss on the long calls is too much for me.
Believe me Chris I'm the "king" of legging in and sometimes it worked like a charm and sometimes left in the dust....my point is that "in general" it is NEVER the BEST strategy...IOW there are other strategies that work better on a consistent basis. Again being naked for a time either adjusting or "legging" in will work enough to encourage people to do it however as a PLAN...just isn't the best. Not just my opinion but most proficient option traders I have encountered via reading their books or their real time trades. Calendar spreads ARE very tricky that way and certainly are not as profitable a a naked long/short that works. They can, much like CC;s, generate monthly income, they are definite volatility plays...but it takes a long time to know first WHEN to put one on and the best candidates for a calendar.
Chris,somehow I agree to your opinion.We don't know his real situation,maybe it is just a portion of his overall position. Maybe he was wrong,but for me,losing 40k in options is better than losing 40k in value-investing at the beginning. At least,it gives people quick lesson.