Buying stock to cover a call

[BlueWaterSailor]

sounds like you sold a naked put on a stock that dropped hard thorugh your strike and before being assigned the stock you decided to sell a call at the same strike.

If I read this correctly, you took a losing short put and turned it into a naked straddle.

Not smart. If you get assigned on the Put at expiration then the call expires worthless and you have long stock at a loss (depending on premium collected and price of stock).

Well, it's cash-covered rather than naked, and a calendar rather than a straddle - and I'm OK with holding the stock and selling calls on it. In fact, I only sell puts on underlyings for which that's true. Given that, I'm not sure why it's "not smart" (not arguing, just trying to understand.)

Now you state what if you sell the put and market rallies and now have short straddle. Then buy stock to cover the short call. Without actual premiums in most cases it is hard to describe 100% what can happen but you first said you wanted to own the stock long term but now you end up buying the stock and capping the upside with a short call.

Basically if the stock rallies you are just better off closing the short put for a profit and then decide what to do next separate and apart.

Sorry, I obviously didn't convey my meaning very clearly. It's not that I want to be long the stock - I'd rather stay liquid and keep trading - it's that I don't mind holding it and selling calls on it if that's how it turns out. What I'm trying to do is have a clear picture in my mind of how to respond when it goes against me.

In most cases, I take these trades off when they reach 50% profit. If they go against me, I generally roll them out in time until they come back up. In the rare case (such as this) when the stock really tanks, I will generally sell a call, take assignment, and continue to sell calls until I've recovered my basis - either via the price coming back up or the total received credit.

The only situation that requires any kind of complex management is this one: the stock tanks early on, and then (after I've sold a call) rallies sharply. My purpose here was to see if anyone could offer advice on what to do in those situations. It's not critical; as I've mentioned elsewhere, closing this thing out right now would result in essentially a scratch. But my main purpose in options trading is not just to make a profit, nice as that is; it's to learn to understand how things work. That's why I'm here asking for advice and perspective - it's not "how do I squeeze profit out of this trade?"; it's "what would be the right approach here and why?"

Thanks for your time!

 

[BlueWaterSailor]

Option trading is a business. If you use terms like sort of it shows your lack of experience.

Yes. Am I supposed to be ashamed of that or something? What purpose was this supposed to serve?

If your point is that no one should trade options without experience, perhaps you should draw a flow chart of how that should work and ponder it for a while. Me, I'll keep on trading small, learning whatever lessons I can - including from people who do have experience and are willing to offer help rather than useless sneering - and gaining experience. Knowing myself as I do, I'm certain that I'll be putting it to better uses than fattening my ego on people who ask for help.

 

[BlueWaterSailor]

Yeah, I wasn’t clear what he is trying to accomplish - hedge or squeeze more profits out of the situation.

Trying to understand the pros and cons of the available choices. That's much more difficult than just hedging or trying for more profit - but that's my main goal in trading for now (and for some years to come.)

 

[BlueWaterSailor]

Look at your net delta.

That's quite destriero-like advice... I like it! In fact, it reflects my take on the trade quite well; both are pretty much neutral right now. And given the rally, perhaps I should think about doing something to make it more positive.

Is that a reasonable take?

 

[Option_Attack]

One thing that scares the crap out of me is naked short calls. Thinking you can watch it and layoff risk realtime ignores all the crazy shiite that can happen. I assume it is a very small position relative to your port, but you just can't model that "infinite" risk. Probably all that would happen is a nice bite out of you, but still...

 

[BlueWaterSailor]

One thing that scares the crap out of me is naked short calls. Thinking you can watch it and layoff risk realtime ignores all the crazy shiite that can happen. I assume it is a very small position relative to your port, but you just can't model that "infinite" risk. Probably all that would happen is a nice bite out of you, but still...

Brother, you've called it. This is exactly why I'm trying to plan things out ahead of time, before I get hit by something like that.

(To be precise, I did buy a junk call when I sold that one; I've taken what some of the more experienced folks here said to heart, and don't do pure naked calls no matter what. But it's a synthetic equivalent.)

 

[zdreg]

Yes. Am I supposed to be ashamed of that or something? What purpose was this supposed to serve?

If your point is that no one should trade options without experience, perhaps you should draw a flow chart of how that should work and ponder it for a while. Me, I'll keep on trading small, learning whatever lessons I can - including from people who do have experience and are willing to offer help rather than useless sneering - and gaining experience. Knowing myself as I do, I'm certain that I'll be putting it to better uses than fattening my ego on people who ask for help.

Nobody was trying to shame you. You have a short fuse and that will cost you in the market.
A reasoned response to my post would have been what do you suggest?

 

[BlueWaterSailor]

Nobody was trying to shame you. You have a short fuse and that will cost you in the market.
A reasoned response to my post would have been what do you suggest?

Well, "nobody"... that was the question in the opening post. You chose to play shaming games and practice unlicensed and unasked-for net.psychiatry, just as you're doing now. A number of people responded, and most tried to help to whatever degree they could; yours stood out as containing nothing of worth. Seemingly intentionally so, which impression you continue to reinforce with your subsequent responses.

You know nothing about my fuse, short or long, but you keep digging the hole deeper and deeper. Why not stop, take a deep breath, and start acting like a person with a modicum of grace and kindness? It will look much better.

 

[zdreg]

Your response is the fuse. If you want to feel that you are being shamed be my guest.
Actually my thought will save you a lot of money in the future if you follow it.

 

[BlueWaterSailor]

Your response is the fuse. If you want to feel that you are being shamed be my guest.
Actually my thought will save you a lot of money in the future if you follow it.

I don't feel shamed - that would require me to hold your opinion in some degree of regard, and I have no reason to do that as yet - but I don't appreciate the useless snarkiness. As to saving me money, the simplistic statement of "you don't have any experience, close your trade now" is of zero worth to anyone. If you wanted to actually explain the reasoning behind it - assuming there is any - that would change the entire conversation.