Buying back short leg

R

rjjaz

Bull call spread with same expiration. Stock goes down. Let's say it is a 100/200 strike spread. I can now buy back the 200 strike leg at a profit.

Is this advisable? In my head this is the equivalent of buying the 200 strike at today's price like creating a new long call position - so should I be asking myself if i'm willing to buy this new long call as if I'm evaluating it by itself?
 
You are buying the 200 call with a much higher volatility premium. Take your losses from the 100 call instead and sell it at high volatility. Buy the underlying if you are still bullish or just hold tight because you may not have allowed the trade to play itself out based on your original risk/reward parameters or just close out and chill.

Be aware of how much your new delta exposure is because you may be employing a Martingale strategy (double down) which is usually a trading no-no.
 
I'm not understanding the rationale behind dumping the long position instead of the short position, at least if his outlook remains bullish, so I hope you clarify. Certainly the decision to not buy back the short must depend in part on its current value. If I can realize 80% or more of max gain, I'm buying it back or rolling. Then again, I have a lot to learn, so learn me . . .
 
Are you saying that you buying (to close) the 200 call, while holding the long 100 call? If so, you are not establishing a new long position with the higher call. By closing the short leg you are increasing your risk to the downside.

Keep in mind, it is not possible to adjust a losing position for a profit.
 
Doobs789 said:
Are you saying that you buying (to close) the 200 call, while holding the long 100 call? If so, you are not establishing a new long position with the higher call. By closing the short leg you are increasing your risk to the downside.

Keep in mind, it is not possible to adjust a losing position for a profit.
More...
Yes buying to close the short position and keeping the long.

I'm wondering if I should be thinking if I would be "buying the 200 call at a reduced price as if establishing a new long 200 call" and deciding if that is a trade I would have done if I started with no position (100% cash).
 
Buying to close a short call is not a necessarily bullish move. Your profit is capped, so it could just be smart money management. You could still think the trajectory is downward -- the question then becomes do you want to roll to another short call?

Maintaining the long call after closing the short IS a bullish move.
 
jimmyjazz said:
Buying to close a short call is not a necessarily bullish move. Your profit is capped, so it could just be smart money management. You could still think the trajectory is downward -- the question then becomes do you want to roll to another short call?

Maintaining the long call after closing the short IS a bullish move.
More...

Yes I'm still bullish, and I suppose closing the short is a more bullish move?
 
Seems like you just want reinforcement on what you are set to do.

Look at the delta change when you close that short. It could be a radically bullish move. Do you trade the underlying like this?

I am starting to think that you really do have a 100/200 call spread. Then, what you should do is close the account.
 
xandman said:
Seems like you just want reinforcement on what you are set to do.

Look at the delta change when you close that short. It could be a radically bullish move. Do you trade the underlying like this?

I am starting to think that you really do have a 100/200 call spread. Then, what you should do is close the account.
More...
I don't, but without knowing where the underlying currently trades (could be as varied as 110 - 190), what would be wrong with such a spread? (as a response to "closing the account")
 
rjjaz said:
Bull call spread with same expiration. Stock goes down. Let's say it is a 100/200 strike spread. I can now buy back the 200 strike leg at a profit.

Is this advisable? In my head this is the equivalent of buying the 200 strike at today's price like creating a new long call position - so should I be asking myself if i'm willing to buy this new long call as if I'm evaluating it by itself?
More...



Garbage in, garbage out

If you are serious about an answer to your question you have to give some basic info such as:

  1. Stock
  2. Option strikes
  3. Option expiry
  4. Date of entry
  5. Cost basis at entry
You only provided #2.




:)
 
You must log in or register to reply here.
Back
Top