Sep DNA calls, hedge or not?

Discussion in 'Options' started by AAAintheBeltway, Apr 20, 2004.

  1. I managed to end up long some Sep DNA 110 calls and basically have a double in them. I originally planned to establish a calendar against the March's, but I never put the short leg on. Of course, it would have worked spectacularly. Then I didn't do anything with the Apr's, because Ithought the underlying was due to rally. Now it has rallied. Basically I've already wasted two expirations, and I'm wondering what to do with the position. The May vol's are pretty low. Should I sell them anyway, go out further and sell, turn the Sep's into a vertical or just take profits?
  2. What's your expectation for the stock going forward?
  3. That's a good question. I don't really have an opinion, except that I think it will be fairly firm. I think it is an expensive stock that institutions want to pick up on weakness, that it will show good numbers but probably not do anything spectacular on the upside.
  4. In that case, I'd take the double and move on. The scenario you described would be deleterious to implied vol. Hence, converting to a long calendar may not be advisable. But if you felt compelled to maintain exposure to the stock, you could sell less than the entire position, or you could use some of the proceeds from the sale to buy some next strike up calls. But, based on your stated expectation, while there are other alternatives (i.e. converting to a ratio spread or a long fly), booking the profits might be the best way to go.
  5. You could do the following:

    (1) Sell some options off the table so that you have your original investment back. Then let the remaining fly.
    (2) Sell some other calls and convert it into a vertical like you suggested.
  6. IV is around 30, versus a yearly range of roughly 65 to 24, so it has already dropped considerably. There is also a split coming up. Probably taking profits here is not a bad idea.