Question on a covered call going the wrong way

Discussion in 'Options' started by Norman D Gutter, Feb 14, 2006.

  1. Good afternoon Elite Traders:

    Dipping a timid toe into the options market, I've got several covered calls going, all of which will expire Friday. Some are up; some are down; but the aggregate is up. The worst one is INFY. The trade history is:

    bought 100 INFY at 75.22
    sold 1 Feb 75 call for 1.45
    INFY current price is 71.10

    It seems like maybe I should by back the Feb 75 call for 0.10, and sell another call. A March 70 call for 3.10 (earlier today's bids x asks--haven't checked end of day yet). That would make my break even point:

    buy stock 75.22
    stock commission +.08
    sell option -1.45
    option commission +.08
    First BEP = 73.93
    buy back option +.10
    buy back commission +.08
    sell option -3.10
    new sell commission +.08
    New BEP = 71.09, or right at the stock price.

    Does this make sense? The best I could then do is break even. Do you see another exit strategy? Going with the April 75 call puts the BEP = 71.69, with upside potential. Going with the April 70 call puts the BEP = 69.29 with no upside potential.

    Thanks in advance,
  2. On CC's your exit strategy is really dependent on your view of the stock and where you think it might be in March. I have no opinion on the stock but face what you are facing quite a bit. If you don't think the stock will go up but probably won't go down then sure you can roll it to Mar. You might look at selling the 70 and see if that improves your lot...or even a 70 or 75 straddle...or just let the call expire..sell the stock then just sell the 75 put. .. which of course you would risk getting assigned another 100 shares...however if you think the upside is there, then that is a possibility. One clue might be the IV's...are they high for March compared to other months? Also is there news coming that could affect the IV such as earnings etc? At this point personally I would just let it expire and see what the stock does next week or the following then do another call or just sell it (then sell the put if I wanted the stock). There is NO one best answer because it definitely depends on what the underlying is going to do. good luck
  3. why waste the money and commish to buy it back. in 3 days it expires then sell the march call.
  4. Hi Norman...

    First off let me say I am NOT an options trader. Although, in a previous life when I had hair, I held a Series 4 license.

    That said, my questions...
    Since CC is a bullish to neutral strategy, with expiration or assignment a huge consideration to the strategy,
    what would you have done if the stock moved up 4 points instead? Were you gonna let your 75.22 + commish shares be assigned for 75.00? At what point would you have bought back your call?

    IMO, to do at-the-money CC trades as described, successfully and with somewhat less risk, you need to put on a collar. That is, sell the CC and buy a cheaper, lower strike put.

    I don't mean to be condescending, but it seems you don't have a clear picture of the risks for your trade strategy. But you know the rewards part very well :) And now you are groping with another half thought out strategy just to break even. Actually, it's the same strategy with different numbers... are you really expecting a different result? Take the loss and start anew. You may even determine that a different underlying is a better trade.

    Again, I don't mean to make enemies. ET is a place where we can all learn something, when not taken personally.

    Good luck,
  5. luh3417


    Norman, what is your reaction to the idea of: you sell some naked puts on INFY? How would you feel about this strategy vs. your strategy of covered calls...

    I would also refer you to the recent poll about the best options exchange.
  6. Thank you all the the replies. I'm having computer problems at home tonight. I'll post specific replies from work tomorrow.

  7. wayneL


    This will put the trader into p a position of the stock HAVING to go up to profit, because what you have is a synthetic bull spread.

    This then begs the question, why not just trade the spread? Same payoff diagram, with vastly less capital usage.

    That way, the trader can somewhat replicate the payoff of a CC to the upside/sidewaysside by tradiing an OTM bull put spread, and have some downside protection to boot.
  8. ChrisM


    And what do you do if stocks keep going down more and more ?

    This strategy does not have very much to do with opportunities of options, it is just one of stocks bullish strategies variations instead.

    Therefore, as Donna previously stated, you will not find any option solution for this, as the trade was stock directionally oriented from the beginning.

    Thus, you need design exit strategy BEFORE you trade. My recommendation is - get out, do your homework, then get back.

    The best old rule is - if you`re wrong, do not try to improve yourself, just get out and accept the loss.
  9. Hi Donna:
    My problem is that, in our (my wife and I trade together) swing trading, we have a terrible record of picking stock direction. Our losses are not large due to good risk management, but still we are only 1:2 winners:losers on trades. I wanted to stay in the market, but didn't want to keep doing what wasn't working and didn't seem to be getting better month over month. I've been accumulating some covered call candidates for some times, based on chart patterns showing stocks doing almost next to nothing, moving up and down in very narrow ranges. When we got two weeks into the February option cycle, I decided to put on some covered calls to test the waters and enter some trades. I picked several as close to ATM as I could, bought 100 or 200 shares, and sold the front month calls. I looked for modest premiums, 1 to 2 percent time value remaining, and discounting any small ITM amounts. I have six of these on, spread between my trading account and my IRA. One is at maximum profit and assignment is probable; three are profitable; one is slightly negative; and this INFY thing has wiped out the gains of the four winners.

    If I could predict the underlying with even 50 percent accuracy, I'd probably just be swing trading.

    Best regards, and thanks,
  10. luh3417


    I've been wading through McMillan's Options as a Strategic Investment, and on page 773 (in the chapter Strategy Considerations - Using the "Greeks") he said something interesting:

    "Refer back to the table of strategies at the beginning of this section. Notice that ratio writing or straddle selling (they are equivalent strategies) have the characteristics that have been described in detail: delta is 0, and several other factors are negative. It has been shown how those negative factors translate into potential profits or losses. Observing other lines in the same table, note that covered call writing and naked put selling (they are also equivalent, don't forget) have a description very similar to straddle selling: delta is positive, and the other factores are negative. This is a worse situation than selling naked straddles, for it entails all the same risks, but in addition will suffer losses on immediate downward moves by the underlying stock. The point to be made here is that if one felt that straddle selling is not a particularly attractive strategy after he had observed the above examples, he then should feel even less inclined to do covered writing, for it has all the same risk factors and isn't even delta neutral."
    #10     Feb 16, 2006