Strategy for buying back covered calls

Discussion in 'Options' started by Tom1am, Jun 5, 2009.

  1. Tom1am



    I sold the DIA 84 July cupboard calls awhile back thinking 84 was about the top of the range.

    I was wrong. here is the buy back strategy I am contemplating:

    DIA is stochastically overbought. Right now almost 88 and trading at the top bollinger bandaid. I believe there is a good probabiltiy of retracement to 85-86 within the next several trading days.

    I bought back the July calls and sold the DEc 84 calls for an additional prem of approx $700. to pick up some extra gain on the retracement.

    Seems too easy. I would appreciate any comments.

  2. Hi Tom...Its NOT a buy-back strategy. You rolled your calls. You bought back your July 84...(don't know if you had a loss or gain I'm assuming loss) and placed a new bet that by DEC the DIA will be under 84. The only problem I see is that DEC is a very long way off. If I felt the dow was overbought right now I would certainly look at SEPT...however you many not have been able to cover your loss on the Jul calls by selling SEPT calls.

    If you really feel strongly that short term DIA is overbought take the $700 profit from the Dec calls and buy a short term Jul or Aug put spread.
  3. Richard,

    No, he is not betting that DIA will be UNDER 84 by Dec expiration.

    As all covered call writers, he is betting that it will be ABOVE the strike price.

    When writing covered calls, the maximum profit is achieved when the option finishes in the money and stock is sold.

  4. 1) I don't know why you think it's too easy. For $700 you are taking the risk that DIA stays above 84, with 77 being your break-even point (for this trade - forget the original).

    2) You have the $700 in your pocket now. Thus, if DIA heads lower and retraces, that's bad for you. You are naked short the DIA Dec 84 put and thus, you do well when the market moves higher not lower.

    3) If you believe the market is moving lower, then you make a poor trade. You would do better by waiting for the market to move lower. Why? Because you sold the Dec/Jul DIA 84 call spread and collected $7.

    a) As the underlying moves towards the strike price, a calendar spread widens.

    b) As you wait for the index to move lower, time passes. And that passage of time makes the spread widen.

    c) As the market falls, IV tends to increase. That too, makes the calendar spread widen.

    If the market falls, you will discover that you could have sold this spread for a bunch more than $7.

    4) Selling now is for those who are bullish, not bearish.

  5. spindr0


    The delta of the Jul and Dec 84 calls aren't significantly different this far out so if DIA dropped in the next few days, you would not fare any better with the Dec 84's. You would only fare better on the option side if DIA kept dropping and breached 84 (more downside protection) but that would not be good overall due to loss on the underlying.

    As time passes, the decay rate on the Jul 84's is higher so that several weeks from now, combined with a retracement toward 84, the Jul 84 puts more option premium in your pocket

    To the upside, the Dec 84 provides a higher total premium but less premium per day so its only advantage is more downside protection if you'd actually hold through a drop into the low 80's.

    I think that your best choice would have been to do nothing. Accept the maximum gain if you're wrong and DIA rises and you're assigned. Collect more premium if DIA retraces over several weeks and then roll for a larger credit at lower prices closer to expiration.
  6. spindr0


    I'm not sure I follow. Same strike calls will offer a higher premium for a later month so the loss is covered plus some extra time premium. Am I missing something?
  7. spindr0


    One other thing. How did you get an add't premium of $700 for this roll? Are you tallying the total for a more than 1 lot position (Dec is approx $3 higher than Jul now).
  8. cupboard calls?
    bollinger bandaid?
  9. spindr0


    LOL. 100% true but I bet that someone asks you why you're talking about naked puts and calendar spreads when all the guy did was a covered call :)
  10. spindr0


    You need to go straddle a good option book :)

    Hey! Nice spread!
    #10     Jun 6, 2009