Buying stock to cover a call

[BlueWaterSailor]

I'm looking at a strategy that seems to make sense, and wanted to bounce it off the smart folks here to see if I'm missing something. All input is welcome, and appreciated.

About a month ago, I sold a put on an underlying that dropped like a rock right afterwards. Since I'm OK with holding that stock, I sold a call against it for a month out at the same strike as the put - sort of a covered call on the stock that I will be taking.

Unsurprisingly, the market did what it does... and now the stock is rallying. In fact, it looks like it's going to blow right past my strike - which means that I won't be getting put the stock, and will have a call not backed by anything. So my thinking is this: if the price does reach the strike, I can buy 100 shares of stock and close the put, which should be nicely profitable by then. That leaves me with a covered call - which was part of the plan anyway - and a call against the stock that won't hurt me to have called away, since it would be called at the same price as I paid for it. (Obviously, if the price goes back down again, I have downside exposure... but that's just life with covered calls.)

Does this approach make sense, or is there a better way to handle it?

 

[zdreg]

Unsurprisingly, the market did what it does... and now the stock is rallying. In fact, it looks like it's going to blow right past my strike

You don't have predictive ability. I would close your position and accept the profit on the put position + or - minus the profit/loss on your call.

 

[Option_Attack]

So you legged into a short straddle? Is it in profit right now? Lots of ways to play, but since I habitually close profitable trades way too early, I would tend to close it out and move on. If your intention is to just own the stock and write calls, then yeah, buy the shares. Otherwise maybe convert into a calendar, vertical, or diag? Much less margin. Too bad Des is gone right now. I'm sure he would have busted out an amazing "broken-backed iron condor fly vol-skew kickass trade!"

I'm looking at a strategy that seems to make sense, and wanted to bounce it off the smart folks here to see if I'm missing something. All input is welcome, and appreciated.

About a month ago, I sold a put on an underlying that dropped like a rock right afterwards. Since I'm OK with holding that stock, I sold a call against it for a month out at the same strike as the put - sort of a covered call on the stock that I will be taking.

Unsurprisingly, the market did what it does... and now the stock is rallying. In fact, it looks like it's going to blow right past my strike - which means that I won't be getting put the stock, and will have a call not backed by anything. So my thinking is this: if the price does reach the strike, I can buy 100 shares of stock and close the put, which should be nicely profitable by then. That leaves me with a covered call - which was part of the plan anyway - and a call against the stock that won't hurt me to have called away, since it would be called at the same price as I paid for it. (Obviously, if the price goes back down again, I have downside exposure... but that's just life with covered calls.)

Does this approach make sense, or is there a better way to handle it?

 

[zdreg]

sort of a covered call on the stock that I will be taking.

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

 

[zdreg]

Too bad Des is gone right now. I'm sure he would have busted out an amazing "broken-backed iron condor fly vol-skew kickass trade!"

What happened to Des?

 

[qlai]

If your intention is to just own the stock and write calls, then yeah, buy the shares.

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

 

[xandman]

Look at your net delta.

 

[Option_Attack]

Got pissed that Baron disabled his block function. Said he'll be back after the election.

What happened to Des?

 

[El OchoCinco]

I'm looking at a strategy that seems to make sense, and wanted to bounce it off the smart folks here to see if I'm missing something. All input is welcome, and appreciated.

About a month ago, I sold a put on an underlying that dropped like a rock right afterwards. Since I'm OK with holding that stock, I sold a call against it for a month out at the same strike as the put - sort of a covered call on the stock that I will be taking.

Unsurprisingly, the market did what it does... and now the stock is rallying. In fact, it looks like it's going to blow right past my strike - which means that I won't be getting put the stock, and will have a call not backed by anything. So my thinking is this: if the price does reach the strike, I can buy 100 shares of stock and close the put, which should be nicely profitable by then. That leaves me with a covered call - which was part of the plan anyway - and a call against the stock that won't hurt me to have called away, since it would be called at the same price as I paid for it. (Obviously, if the price goes back down again, I have downside exposure... but that's just life with covered calls.)

Does this approach make sense, or is there a better way to handle it?

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).

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.

 

[BlueWaterSailor]

So you legged into a short straddle? Is it in profit right now?

It's a calendar, actually; the call is 30 days out while the put has 9 days to go. The P&L is right around 0. It's not any kind of an emergency, and I don't need rescue - more than anything else, I'm trying to learn different ways to think about and manage positions.

Lots of ways to play, but since I habitually close profitable trades way too early, I would tend to close it out and move on.

Not unreasonable; I generally take trades off at 50% or less, and that's probably best in this case. Since the put position has a bit more theta than the call, I'm tempted to hold until it's a buck or two below the strike and get out then - since every day that it takes to get there results in more profit. For the most part, I'm OK with this position as it is... just thinking about different ways to respond depending on what the price does.

If your intention is to just own the stock and write calls, then yeah, buy the shares. Otherwise maybe convert into a calendar, vertical, or diag? Much less margin. Too bad Des is gone right now. I'm sure he would have busted out an amazing "broken-backed iron condor fly vol-skew kickass trade!"

Heh. Yeah, destriero has ways of doing options magic that not only stuns the crowd but also makes you think "damn, that was obvious... why didn't I think of it myself?" afterwards.

Since my intention is to stay as liquid as possible, perhaps closing it for a scratch is the best way to go. I just want to understand what the other options are, and why (and when) one of them would be preferable over others in a given situation.

Thanks for your help!