As always,
riskarb's options analysis is right on the money. I am more of a visual person, so I always build the position graph too (position price vs. underlying price, for several time stamps up to the closest expiration, i.e. today, in 7, 14, 21, 28 days).
After deciding to open a position, based on my forecast of the price and implied volatility, I draw the
position graph for +/-25% increase/decrease in IV. I decide at what underlying price I'll consider that my forecast was wrong and exit. Based on my worst case position loss and my acceptable risk I'll decide how many contracts I put on.
You already opened your position, 25 contracts, but if you haven't done your risk analysis you shout do it now. This might tell you that you may have opened a too large position (risked too much) or not. Anyway you should decide what is the maximum loss you're ready to accept and that should be your position exit.
As
riskarb mentioned, you might already have a strategy to sell premium month after month, or close your position before earnings (next earnings are scheduled after Jan expiration), when supposedly the IV rose (favorable to your position;
currently IV is at or just bellow the 1 year average). If the underlying price drops and the short option premium drops a lot, some people close only the short leg, and maybe roll down maybe stay naked (keep the long leg open). I personally don't like this strategy. At that point I would reevaluate my price and IV forecast, and decide what (if any) position I put on at that moment. In most cases I decide that it is better to close the whole position (I was already wrong on it once).
Hopefully things will go in your favor and you'll not have to cut your losses. If so, you should consider
riskarb's advice for the best profit taking.
Quote from DoxazoAdonai:
Grretings & Merry Christmas! I'm in a calendar spread based on a recommendation. I bought 25 contracts SYMC Jul 2006 17.50 call, and sold 25 contracts SYMC Jan 2006 18.75 call. I know the overall idea is to decrease the cost to me, while covering the possible assignment in January with the Jul call and hoping for a good SYMC move after January expiration. But what I don't know is: what should my exit strategy be? What numbers should I be watching/comparing to decide whether/when to exit?
Thanks!
Scott <><
