What to do about deep ITM RIG call

Discussion in 'Options' started by jedwards, Nov 11, 2010.

  1. I got lucky and am the proud owner of a single RIG Jan 2011 $50 call, after buying it a few months ago when RIG was around $48. I paid around $5 for it, and now it's around $20.

    I'm not claiming to be a genius, it was simply a lucky pick. Believe me, I have plenty of other tremendous losses to make up for this one.

    Regardless, my question is, what would be a good strategy for this going forward?

    Looking at the charts, I'm guessing that if we reach $75, the gap down price after the Gulf spill, then that seems a good a place as any to simply sell my calls and move on.

    But I feel like I have a pretty good long term entry price, so I'm wondering if there are any other techniques I can use. Given I only have 1 contract, my options are a bit limited, but are there any other strategies I can use at this point, given how much I'm in the money?

    Is it advisable to exercise the option, and start writing call options to take advantage of the gains I've made? Or is that not worth the time, and I should just sell it and move on?
     
  2. Why not put a collar on it?
    Buy a Jan $60 put for around $1.50.
    Sell a Jan $75 call for about $2.25.

    The premium from the $75C more than offsets the cost of the $60P.
    Your Jan $60P locks your profit in around $10, so you are still looking at a nice gain on your original investment while giving you a bit more room to the upside.

    An alternative strategy would be:
    1) Buy a longer term put (6-12 months out).
    2) Sell out of the money short term calls until you are exercised.

    Depends on how much time you want to spend with it.
     
  3. This is the easy question. If your inclination is to write covered calls, instead, rather than giving up some time premium, incurring extra commissions, and tying up more margin, just write the call against it, creating a spread.
     
  4. Offset it and be done with it. Avoid the urge to "get cute" by "trading around" it. :)
     
  5. What's a good strategy for this situation depends on your outlook for RIG and your fear and greed :)

    You can close it, collar it, buy an ATM put and turn it into a straddle, sell calls against it, roll it up a few strikes, etc. It all depends on what risk graph appeals to you.

    AFAIK, the most imp't thing to do is to protect that gain.
     
  6. Thanks for everyone's responses!

    I guess what I'll do is look up all these things like straddles, strangles, collars, etc. I know their basic ideas but I've never really looked at them in great detail, so maybe now is as good a time as any to learn and experiment!
     
  7. when in doubt, close position