Max loss for sold naked calls

Discussion in 'Options' started by NHS, Feb 20, 2010.

  1. NHS


    Let’s say that you have sold 100 naked calls in XYZ at strike 100 when the stock was 100. Suddenly the stock moves up high to 150 and you have a loss. You think the stock will move down again at some point so you do not want to take the loss but you want to set a maximum limit to the loss now. What would be the best and cheapest way to do that?

    Buy 100 calls at a higher strike fx 180 – the higher the cheaper premium but the higher maxi loss.

  2. It all depends on your pocketbook.

    If you try to complement the naked calls with another strategy you are going to incur a cost without a return. Right now you have to pay for time value of money, and depending on the length of the option that could be very expensive or relatively cheap.

    However, since the call is so deep in the money there should be very little difference between the option price and the underlying price. I am guessing that the option has a value of 50 to 55.

    If you have the pocket book for 100 option calls then stick with it, and get assigned 10000 short shares at 100. That is if you believe the share price will go down.

    Another solution is to do a partial solution, meaning. Do a bit of strategy X, Y, and Z. So for example buy back some calls, let some be assigned, short some shares now, and sell some out of the money call options. That way you will get more than you think, and loose less than you are facing.
  3. There is really no way to rescue this trade. A good trader would ahve never let this thing get this far. Right now, you are looking at a paper loss of $50,000.00--I am certain that your risk:reward is way out of whack. In the future, if you must do this type of option strategy, you will do it as a bear call spread--where buying the upward protection right away is cheaper than trying to exit later.

    At this point, you can buy the undrelying at 150 to lock in a "loss," but if the underlying returns to the strike you will have to exit the underlying to avoid extra losses. You can exit the trade and take the loss right then and there--it is cheaper to do it this way than buying an OTM call to protect. If there is a great deal of time left before expiration, I would exit the losing call and be done with it. If it is the week of expiration, I would probably buy the underlying.
  4. Why in the world would you set a maximum loss AFTER a 50 point move against you? If your money timing and management is so bad that you let a short $100 position move to $150, you should be thinking about a new hobby rather than predicting a reversal.

    Either set up positions with inherent risk protection (spreads) or use a stop loss, real or mental. The objective of investing and trading is to make money but there's no way in hell you can get thereby with a mentality that accepts losing 50% or more on a large position.
  5. NHS


    I guess you are unable to look at the thread as it was intended, to me is seems pretty obvious from the numbers 100, 150, 180 etc that this is not a real world example. If you do not have any input to why in the world waste time on it
  6. Exactly. It happens all the time. We have lots of genius bosses here with no inputs.
  7. He flies his hypothetical weathercock kite, but yet he doesnt want any wind. Real world example or not, it was a real dumb-ass question.
    He SELLS call @ 100....sits with thumb in his ass while price moves to 150 , .....then he suggests Buying calls @ 180.:D
    Advise mamma,s boy there to pay someone to babysit , whilst teaching him . JW said it all in his first sentence...''There is really no way to rescue a trade like this '' but i guess , we are all just waisting time here.
  8. NHS


    The questing was: what is the cheapest way to set a stop loss to a short call position given that you do not want to close the position. Buying calls or maybe buying futures, etc – there might be many ways to do that and I was just looking for the cheapest method.

    Anyway if it will boost your ego and keep you off the streets I have no problem being the dump-ass of the forum.
  9. How hard is it to get off your dump-ass and look at an option chain to find the answer? And buying futures to hedge a huge loseing short naked call position on a stock is sheer genius. NOT!
  10. OBAMA and Bernanke are featured in a movie-- about short selling and greedy hedge funds called "Stock Shock." Even though the movie mostly focuses on Sirius XM stock being naked short sold nearly into bankruptcy (5 cents/share), I liked it because it exposes the dark side of Wall Street and revealed some of their secrets. DVD is everywhere but cheaper at
    #10     Feb 21, 2010