I have a few years stock investing experiences. I just started the option trading three months ago. I own quite a lot of EWZ March 70 and June 75 calls. The objective is to write monthly cover calls to generate income. I have successfully done it in the past two months. Now the EWZ is plunging. I know I made a huge mistake. With my option knowledge level I shouldn't converted all my EWZ equity holding to option. Any advises to add other options to a compound spread setting to help preserving the value and generate income will be highly appreciated.
This may help you to lose less money than you are already going to lose. Sell 2 June 75's. Use the money to buy a June 67. You now have a short 75, covered by a long 67. Similarly, sell 2 June 70's. Use the money to buy a June 60. You now have a short 70, covered by a long 60. In general, if you want to sell short calls against long ones, a safer strategy is to use long calls that are very deep in the money. Then sell some short calls against them, but not as many as the number of long calls (using fewer short calls prevents upside losses). This strategy yields less, but substantially lessens your risks from stock price movement and implied volatility decreases.
I'm not sure whether it was your former objective to write calls against the stock or a current one to write them against long calls (verticals). Either way, they should have been written before now rather than just riding your long position down. Sadly, there's no simple way to recover the money lost. You'd have to write ITM calls or overwrite OTM (risking an upside rebound loss), and/or get some amount of EWZ rebound to salvage your situation. At this point, you should be asking yourself if you can withstand further drop in the EWZ and subsequent call losses or are you going to gamble whatever salvage value you have on a rebound and recovery? It's a tough choice and there's no way to know today what the better one is. Sorry to say this but you have no business entering into positions like this without a comprehensive knowledge of option strategies, adjustments and money management. You need to have your plan for the "what ifs" in place before opening the position. Good luck with your EWZ calls and I hope it works out for you.
How does this help the OP if the underlying keeps dropping? He realizes his current loss on his long calls as well as add'l loss on the verticals and that might approach the original spec money total.
This may also help you lose less money than you are already going to lose. Amazingly enough, I believe in this case selling everything is not the best way to cut your losses at this point. This assumes you can sell spreads in your account. My thoughts, from most conservative to riskiest: 1) Sell the Mar71 and Jun76 calls. This locks in your loss, but recovers $2.42 (Mar) and $2.72 (June). If the markets recover above 71 by Mar, you also get up to an extra $1 on Mar and if they recover above 75 by Jun, you recover up to an extra $1 on those as well. 2) Sell strikes further above your calls (Mar 72 or higher and Jun 77 or higher). This allows you to recover a greater portion of your account ($1 for each strike you go above 71 on Mar and 77 on Jun) if the market recovers at the expense of giving you reduced protection should the market continue to slide. Do NOT sell strike prices below the strikes you hold! You will recover a bit more premium if the slide continues, but you expose yourself to additional losses if there is a recovery and the ratio is NOT linear. Since you are new to options, I'm not going to venture in to scenarios where you buy puts, generate new positions, etc, as each exposes more and more risk and requires management. It's pure damage control at this point, so your best bet is probably to do some combination of #1 and #2 (maybe 75% #1 and 25% #2). This depends on your personal outlook of how EWZ will fare. On the charts, EWZ is right near decent support, so you could see a bit of a bounce here and this might allow you to sell calls at a slightly better price. I don't know much about the Brazilian economy, so it could be healthier or sicker than the charts indicate. My $0.02
You are right, it does not help him if it keeps dropping. It might help him a little if it stabilizes. However, the prices are around zero for the spreads I described. So I don't think he will lose any more money than he is currently going to (assuming EWZ does not rally back to the 70's).
Thanks for all the advises. Within 2 weeks, I've sold some of my March 70 and June 75 call, and bought March 65 and June 70 calls, in addition, I kept lowering down the strike price of the Feb. covered calls. However, I have lost 3/4 in my EWZ options since Mid January, which is 1/8 of my total asset. Along with a few of my other other LEAP vertical spread expiring Jan. 11 for LVS, QCOM & etc, and some stocks, I have a total 1/4 loss since the market high in Mid January, which is my one year family living cost or 1/3 of my house mortgage. In just 3 weeks I lose 1/4 of my asset!!! It is my biggest lose in my 10 years of self stock investing. The balance of my option asset in my account currently is my 5 months living cost. I can expect the bounce back of my stocks, but I have no idea about EWZ options. I am deciding to sell off all my options on Monday..... I have to make this painful decision.....I can't put up the torture anymore... Again I shouldn't convert my EWZ stock asset to option...I thought writing monthly call would offset of decay of option and even make money. I wasn't aware Brazil ETF would go down this far. They say emerging market growing is V shape, while US can be U shape. I hope this posting can help other conservative make-living investors/traders.
Yep, the world's markets are tied together. Your only "safety" is conservative risk management. Looks like the current EWZ downturn is only moderate compared to some others it had. <img src="http://chart.finance.yahoo.com/c/5y/e/ewz"/>
I rarely trade options, because I don't feel comfortable with the time decay...Cannot help you with any option specific info, but would like to comment on what I see in the EWZ chart... Since you're losing such a large size of your portfolio, sounds to me you're trading way above your risk level. Especially since you just started trading options... EWZ has an easy recognizable H&S pattern, you should have been out of those calls as soon as EWZ started falling off the RS, and broke the 50D SMA (or EMA). As a matter of fact all shorter term MA's were rolling over before the 50, so warning shots were fired...Maybe option traders don't look at the daily and weekly charts, but I doubt this very much... Biggest item to me: Position size...keep 'em small to keep the losses small...You should have had a loss of 0.25% of your total portfolio...Actually, you should be on a option trading simulator for months and months, through a cycle (markets up +10% to markets down -10%, or similar)... Don't want to harp about it, but charts & position size would have saved your day... Been there, done that!!! Never again!