Writing a call against a losing long call

Discussion in 'Options' started by artvandaley, Mar 6, 2020.

  1. Hello,

    Let's say you own a long call that expires in a month or two and it appears the call will never recover back up the strike or whatever your break even point is. As a way to now limit one's loses, could you not write a call against the losing call using a lower strike? For example, you initially went long with a $26 strike when the underlying was $25, and currently the underlying is at $18. Let's say you write a call using a $21 strike with the same expiration, which will be a credit worth about 75% of the initial cost. If it's called away at $21 or it if it expires worthless, it's a win either way yes?
  2. SanMiguel


    You can, it then becomes a spread but if it rises above 21, you will start coming into loss territory.
    You could also buy a put if you think it's going further. You could also do calendar spreads.
    artvandaley likes this.
  3. Robert Morse

    Robert Morse Sponsor

    IMO, when you are wrong, you have to learn to take losses and move on. I would say that was something I excelled at. Kept me in business.

    artvandaley, Lou Friedman and lindq like this.
  4. lindq


    If the underlying rallies, you'll feel pretty stupid holding a short call.
    Trying to cover a loss with another position is a bad habit to get into. Take your loss and move on.
    artvandaley likes this.
  5. TommyR


    im unclear myself for example why would they need such tremendously huge data centres. no one is disputing it doesnt improve advertising revenue. for something so valuable it needs to have some tangible use that's not what i would call a hoax about aliens and the singularity
  6. ironchef


    So, now for any price <$21, you have a locked in loss of 25% of the original cost. Anything >$21 and loss increases. Worth it?

    When you long a call, you want convexity working for you because your probability of making a profit in each trade is < 50% (assume OTM) and << 50% if DOTM. Converting to a spread completely changes the convexity.
    artvandaley likes this.
  7. Thank you all for the replies. I agree that it maybe questionable on my part to attempt a fix on this trade, and even though it's a rather small investment, I'm just curious as to what routes I could take in order to reduce my losses. This actually started out as a PINS $26/$32 spread. I just bought back the $32 short call today for $30 as it was already down, or up if you like, about 90%. I did so with the hopes of implementing my plan mentioned above. I think I'm missing a piece of the puzzle though. I understand that, in this case of writing a $21 strike, it's value will increase, against me, as the underlying goes up, but my long call will go up in value as well. So what dangers do I face if the stock does exceed $21 before expiration? Won't the long call be "Called away" at some point once over $21? I'm guessing the danger is, that even though the long call's value increases, it's value will be less than the value of the lower strike call, and that I'll owe the difference if an assignment occurs, okay, that makes sense now. Alright, how about writing weekly or bi-monthly calls against the long call (May in this instance) that way I can make adjustments to the strike as need be. I just want to lessen my losses, should have closed the whole thing when it started going down, but I didn't.

    Thanks again
  8. Bobbybax


    You have a loser. Deal with it.

    Creating a salad is not the answer.
  9. SanMiguel


    I disagree. You can create a spread, you can then roll that spread to a future month if it becomes close to running within the spread.
    Managing options is one of the key things about them but you have to know what you're doing.
    What's difficult is that the environment is not really suitable, it's not stable
  10. Bobbybax


    You create a spread as part of a plan, not because of a refusal to accept a loss.
    #10     Mar 7, 2020