Naked ATM call now waaay OTM...

Discussion in 'Options' started by heech, Jun 25, 2009.

  1. heech



    So, just interested in thoughts on this.

    I sell front-month ATM calls/puts, hedging and holding on for expiration. And occasionally, the underlying goes way OTM... which means I'm very likely to get the full premium.

    But my question is... should I perhaps buy a new ATM call, and turn this into a call spread for free?

    Specific example:

    - I sold APWR 12.5 calls 2 weeks ago. (Jul09)

    - It plunged to 7.5 earlier this week, and trading at 8.3 today.

    I can hold onto those 12.5 calls to expiration... in which case I'll with great likelihood make the ~$1 a contract.

    I can also buy 7.5 calls (which are about the same price as the 12.5 calls I sold 2 weeks ago). Then my maximum upside goes up to $5 a contract... but I also potentially get nothing.

    What would you guys do?
  2. 1) Stick to your original "plan".
    2) Ideally, the 12.5-calls will expire worthless and far out-of-the-money.
    3) In addition to knowing your maximum loss and gain, you have to be able to assign probabilities to those scenarios too.
    4) Be on the lookout for your next trade. :cool:
  3. spindr0


    Your calls have an asked price of 10 cts. Is there any possibility that you could find another trade that could make more than 10 cts in the next 3 weeks?

    Don't monkey around buying long ATM premium. Put in an offer to buy to close at 5 cts.
  4. heech


    To be honest, I have far more margin than positions I can find... so having capital tied up in that isn't much of an issue.

    The greater concern in my mind is the (non-insignificant) risk that APWR spikes back up and gets back into play. That might be a good reason to just give up the 5 cents, with 3.5 weeks to go.
  5. Margin is NOT the issue.
    Risk is the issue.

    As SPIN says, if you cannot make more than that nickel from a different position in the next 3+ weeks, you have no business trading.

    The last nickel or dime is for someone else/ Let them have it.

    Here's one other point. If you take a profitable position and turn it into a 'free play' - there's nothing free about it. The profit is yours. You earned it. Don't fall into the trap of believing it's house money. It's your money.

    So, if you open a new position, it's not free it costs whatever it costs.

  6. spindr0


    Having margin available has nothing to do with locking in gains and taking risk off the table (which as you noted is APWR spiking up and going into play).

    IMHO, any way you cut it, trying to collect a nickel in 3 weeks is a bad position.
  7. heech


    Right, as I noted, risk is the primary consideration.

    The other side of the argument here though... as I've mentioned before, I have ~75 positions a month. I'm really playing the odds/statistics here. If I give up that nickel every time on whatever percentage of those 75 positions are deep ITM/OTM... it adds up quickly.

    Let's say roughly, the expected hedging cost to me *if* APWR (or any comparable) jumps back up to 12.5 will be another ~$0.50.

    Well, then... my thinking is if fewer than 10% of my deep ITM/OTM positions over time jump back to ATM, then I should hold on for that nickel.

    I'm not sure I know the answer yet. I'm just giving the other side of the argument.
  8. heech


    And the *counter* counter argument goes... which goes to the "think of each decision as a new trade" attitude...

    If I really thought the odds were in my favor, I'd go out there and buy deep OTM nickel calls/puts everywhere. Which in itself might be a perfectly valid strategy as well...
  9. spindr0


    LOL. It's only an argument if you make it so.

    Is there some magical day in the month, perhaps the Monday after expiration where only on that day you can find positions worth taking for the next month? Is there any possibility that you could cover this position for a nickel and find an August position a few weeks early?

    Let's see... 5 cts divided by 22 days until exp is about 2/10 of a penny per day, ignoring commissions. Now if you can find an August option to sell for 13 cents, you can make the same amount per day. Any chance of that?

    It's a silly argument.
  10. As you surmised a large majority of the time you'll pickup that last nickel.

    Then one day you won't and lose 20, 30, 50 or more nickels in the process.

    It all depends if you want to pickup your nickel when you hear the whistle, see the headlight, or feel the ground shake.
    #10     Jun 25, 2009