I trade based on a fundamental model. I have a position which has gained ~75% in value, and I'm looking to exit the position soon as I see the valuation and timing get stretched. I want to use the potential tax bill on the latent gains to finance another bet (and changed view) using options and without materializing the gain. My view is that the stock will most likely run up another 5-10% but there is a big risk that forward guidance on either next earnings or the one after next disappoints causing a gap down. So I only want to make money on next 5-15% of upside, hedge my current gain, and as a bonus -> turn the bet into a convexity play on downside. I'm thinking of going long a put 5-10% OTM and selling a call 10-20% OTM. I am completely unsure about DTE and whether or not I'm choosing the right options. Can newwurldmn, SLA or other knowledgeable traders help me think this through? PS - regarding timing...do I care more about Delta or Vol when trying to do this? (seems perhaps delta is more relevant for my situation...but I have limited experience modelling options so perhaps IV overpowers delta and my timing decision should be based on IV, not what the stock is doing?). Thanks in advance for any help!
Can you clarify how you are going to use a tax bill where you owe the government money to finance another bet... I think you mean something else but was not clear... If you want to take off your position that gained 75% to lock in your gains but still participate in the upside if stock has more to go then you can sell the stock and take a small % of the profits and buy Calls (CALL REPLACEMENT). If you think stock maxxed out you can take your gains off and put a small % into a PUT to trade the new directional bet you are making. If you dont want to sell the stock then you can simply add a protective put and ride the future gains while hedging off any drop in price as insurance. If stock does move higher then sell it and leave the put for the ride down.
Sorry if I wasn't clear enough. What I'm trying to do is go mostly risk off, without selling the shares (I'm attempting to avoid cap gains). So I'm trying to construct a position with a max risk that equals my potential tax bill while simultaneously expressing a bearish view. Willing to give up the upside if I can get hedged + paid on downside at the max risk/cost of the potential tax bill (as calculated when the position is initiated). Basically, I was thinking about a synthetic short position, but I don't know how to construct it - because tricky part for me is how to optimize for max risk/return.
Let's use NFLX as example. 1. You can use synthetic short to completely offset 100 shares of your position, thus instantly flattening your P&L: 2. You can pick different strikes to create a reversal, which together with your shares would act as synthetic spread: 3. You can also adjust the number of shares to make your positions more bullish or bearish, with some price targets, for example bullish up to specific $price: 4. You could also add the cheapest LEAP call to hedge to the upside, just in case: Target date may not matter much, but you could pick something in line with your target for capital gains, like a year or two.