What to do? Let it get called away or Buy to Close?

Discussion in 'Options' started by sps_45, Jan 18, 2006.

  1. sps_45


    I have a year plus position I am a little stomped on. I have run the numbers briefly and feel either action won't make a difference as far as profit or loss goes.

    I bought INTC like 2 years ago for 27.8 and sold some covered calls in May 2005 (Jan 2006, Strike 22.5 @ $4.10). Because of the earnings the calls expire on Friday and are now trading at like 0.30. Should I let the stock get called away, which it most likely will being it is at 22.75 on Friday or buy to close the options and take the profit on the options and keep the stock which will be a $5+ losing position again. It seems like either action will be the same or no significant difference, the only big thing with buying the calls back is I get too make my profit on the options and keep my stock. INTC isn't hot right now, so not even sure if it is worth keeping. If I let it get called away I ultimately get to sell the sold at 26.60 and don't have to worry about any decline of INTC stock as I will be out after a 2 yr+ holding period.

    Any suggestions?
  2. May be I'm confused but if you purchased INTC for 27.8 and sold calls for 4.10 isn't your new basis 23.70? did you sell other calls?...If your basis is 23.70 (how do you come up with 26.60?) then at this pt let it get called out..if it is cheap buy back and write new calls. In any event don't do anything until Fri imo...or even late tomorrow (to see if it gets below 22.5....if it stays there then you won't get called out and can write against it. The other thing you can do is let it get called out then write a 22.5 Feb put/ or put spread....reducing your cost basis again...just some thoughts..good luck
  3. bellman


    I don't know options, but from what I gather, it would depend on whether you are bullish or bearish on INTC, and transaction costs as to whether you let your shares get called away. Trying to learn myself as much as help you out.
  4. sps_45


    Thanks for the input. I'll definitely wait as late as I can. I came up with 26.60 as my sell price by adding strike price + premium. 22.50+4.1=26.60. I kept my same basis as 27.80, I'm sure the numbers come to the same.

  5. OTR


    I don't ever like to take a loss. If you get called out you lose 1.20 per contract on a position you've held for 2 years. Obviously, not a profitable trade. Instead I suggest you buy back the call, lock in a 3.80 profit on the call and get ready to do it again, this time with better management of the position.

    Here's how.
    Today's thrashing brough INTC to an important support line that started in th fall of 2002. Go to BigCharts.com and check it out. You'll also notice that intc has been in a roughly sideway direction since November.

    There was a lot of emotion in the market today driving prices down. You need to see what happens from here. If the support holds, intc will bounce back up and should move close to the 26 range. When it does, sell another call. This time, go out of the money. Take a look at the Jan 07 27.50. It might be in the 2.00 range. If so, sell it for about a 7% return on your initial stock purchase price of 27.80.

    Now you have to manage the position. If the stock goes down, buy back the call when it get's to about .60. Your profit will be 1.40, or roughly 5% of your stock purchase price. Wait for it to go up and do it again. Keep doing this until the you get called out at a profit.

    As long as the stock is down, you might as well sell calls against it on a regular basis. Just be careful not to get called out at a loss.

    Steve Rosenbaum

    Option Trading tools the pros wish they had! A former Chicago Mercantile Exchange
    employee reviews stock option trading software, books, and web sites and online income opportunity.
  6. In effect you have come up with what you see as your break even costs....I think...but THINK about it. You purchased stock at 27.8 then RECEIVED 4.10 in CREDIT right? so now your NET cost of purchasing the stock is 23.70. Granted you have sat on it for two years or so...however as of today your realized LOSS is only about a buck...I've been In and Out of INTC for the past 10 years and I will tell you that I'm looking to buy (or sell the put) INTC at 22.5...as I see it your actual loss is only $1.20 (on paper) not great but certainly not a disaster. Before I bail out I will make sure I'm within a .05 of what I would realize if it were called out. Then I only do it if I want the money for another investment.