What is best strategy when long OTM puts go deeply in money?

Discussion in 'Options' started by bubba1, Dec 21, 2008.

  1. bubba1


    I'm long some 110 H9 puts on SPY and (a) don't want to take the capital gain this year but (b) want to lock in a good part of the profit. What is best put (or combination of puts) to sell?
  2. dmo


    You can also lock in profits by buying SPY itself.
  3. bubba1


    If it was a snake it would have bit me -- it's the obvious solution and I ought have thought of it myself. Thank you.

    Would it be right (smart) to sell the call as well? And then just hold it to expiration? One question -- if it turns out that there is a pin at expiration, how much will it cost me to do a conversion? ( And can I do that without legging it ? )
  4. As suggested, you can buy the SPY. If margin is an issue, you can buy OTM calls but that's going to involve a bit of slippage if SPY reverses (distance to strike plus some/all of the call premium).
  5. dmo


    The March 09 110 calls are only worth about .60. If you buy the SPY you can sell the calls if you want and you've got a conversion (long the 110 puts, long the stock, short the 110 calls). At that point everything's locked in. Or if you're bullish you can buy the SPY but NOT sell any calls, and then you'd be long the synthetic 110 calls (long the 110 puts, long the stock). Then if SPY goes back above 110 between now and expiration you can double your fun. Your call.
  6. If looking to lock in profits, yes, buying the underlying is the best approach.

    But DO NOT by OTM calls. On a rally, your puts will lose value rapidly and those calls will provide little, if any help.

    Much better is to sell put options that are one strike above or below the ones you already own (depending on whether you are seeking additional profits or truly want to lock in your gain).

  7. bubba1


    I ended up doing it in thirds -- bought one unit of SPY, sold one unit of 105 puts and one unit of 115 puts . . . .