"Fixing" Options Trades

L

lightrader

Hi, I consider using a strategy that involves selling OTM short puts on good companies to capture time decay and possible price appreciation of the underlying, while having a reasonable cash cushion in my account to help in cases of assignments. However, although the companies will be selected based on a thorough research, there is always the chance that the underlying will move down and the option will be at a loss.

Since I heard people talk about adjusting or rolling options that are in a loss, I want to understand if there is indeed any reliable method to "fix" an option trade that is in a loss in a way that it will neither cause an unrealized loss to become a realized loss (for example by just closing the position) nor increase the capital at risk (for example by rolling the option down or forward).

Appreciate your help!
 
Quote from lightrader:

Since I heard people talk about adjusting or rolling options that are in a loss, I want to understand if there is indeed any reliable method to "fix" an option trade that is in a loss in a way that it will neither cause an unrealized loss to become a realized loss (for example by just closing the position) nor increase the capital at risk (for example by rolling the option down or forward).
More...
Adjusting a position doesn't "fix" a losing trade. It usually involves limiting further loss or taking in add'l premium to lower your cost basis give you the ability to hold the position a bit longer, hoping for a recovery. If the underlying continues down, your loss will continue to accrue.

In the case of rolling a NP down and out, you do indeed realize the loss on the initial position. However, if you haven't waited too long (the UL's price has dropped several strikes), you will sell that new NP for a larger premium and your cost basis will be lower than the fist sell.

Other possibilities to soften the down move include selling call premium (naked call, bearish call spreads, etc) but shouldn't be attempted unless you fully grasp their implications.
 
Just find the best option based on same estimated volatility and interest rate and sell to compensate with premium collected. Pretty easy.

Don
 
Quote from Don Bright:

Just find the best option based on same estimated volatility and interest rate and sell to compensate with premium collected. Pretty easy.

Don
More...

Do you mean selling a new option (in addition to the position that I already opened)? Isn't it just increase the risk since my exposure will be to an additional option position? As mentioned in a previous reply, I understand that it may reduce my cost basis but still it means that I increase my capital at risk and therefore it also increases the chances to lose more money if the underlying keeps going in the wrong direction...
 
Too many people get burned chasing high premiums using option scanners etc.. And trying to juice the returns.

Remember there is no free lunch, high IV indicates high risk being priced into the option.
 
Quote from lightrader:

Do you mean selling a new option (in addition to the position that I already opened)? Isn't it just increase the risk since my exposure will be to an additional option position? As mentioned in a previous reply, I understand that it may reduce my cost basis but still it means that I increase my capital at risk and therefore it also increases the chances to lose more money if the underlying keeps going in the wrong direction...
More...

OK, let's try this step by step. Stock is $40. You sell a $35 put, stock goes to $34.50, so you're still close to profitable, but don't know if you will be assigned or not since it's still a week or two away from expiration. You sell some $30 puts to collect more premium, probably doubtful stock will go down another 20% in a couple of weeks (If you think it might, you didn't do your homework correctly, or you have a 2 or 3 standard deviation move).

Or, you sell $40 calls to bring in some more premium, think about it. Would you be scared the stocl is now going back up? Graph the results out, you'll see what I mean.
Don
 
there's no such thing as fixing a losing trade. either you do nothing, implicitly buying your current position, or you do something, explicitly creating a new position. It all depends on your view given the new information. It should be treated as if you had no position. What would you do then? Same is true with winning trades...
 
Quote from mastertrader456:

Never start a new position with a loser.......
More...

Check my note in the other thread about how MM's and floor traders need to look at adjustments on hundreds of positions in dozens of stocks. We just adjust as needed. To keep delta neutral, keep gammas within reason. Not just put "positions" on as retail people do. I sometimes forget that what works for the professional traders may not for the retail guy, and I apologize for that.

We're sort of in the middle now, between MM's as we were, and "family trust" trading that we do now. Still thinking the equities are better for our traders, so much easier to make money, IMO. Especially with somewhat limited capital.

edit:
I know Atticus trades from the MM side as well, and it shows in his answers. We both need to try to understand where some of the retail types are coming from. (not trying to dictate anything, Atticus, just thinking out loud of course).
Don
 
Don,thats a most unusual approach..

Short the OTM 35 put,watch it go in the money and then sell some "more" of the OTM 30's?????

Forget the fact that the 86% spot put will be trading for goober,why would you sell more OTM premium on the same side??

Am I missing something???




Quote from Don Bright:

OK, let's try this step by step. Stock is $40. You sell a $35 put, stock goes to $34.50, so you're still close to profitable, but don't know if you will be assigned or not since it's still a week or two away from expiration. You sell some $30 puts to collect more premium, probably doubtful stock will go down another 20% in a couple of weeks (If you think it might, you didn't do your homework correctly, or you have a 2 or 3 standard deviation move).

Or, you sell $40 calls to bring in some more premium, think about it. Would you be scared the stocl is now going back up? Graph the results out, you'll see what I mean.
Don
More...
 
You must log in or register to reply here.
Back
Top