Hedge my ITM leap position - need help

Quote from spindr0:
I think that buying a deep ITM call LEAP for over $200 and selling monthly OTM calls for $5 or so yields a lousy risk/reward ratio. I think you can get a much better risk/reward in other strategies. If you think it's an excellent starting point then we agree to disagree.
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Can you give me examples of other better strategies ?


Quote from spindr0:
I never claimed that you were inventing anything. I just pointed out that in one sentence you stated that tthe maximum risk b/t 500 and 580 is $6,000 and in the next sentence you stated that it's 0-2000$. I don't need to use a risk analyzer to figure out that one of them is incorrect.
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You are right , it will be somewhere between 2000$ - 6000$ , so we will choose 6000$ as worst case

Regarding to acen , in the beginning I was really excited it may work , but I got immediately disappointed big time after putting his positions on risk analyzer. :confused:
 
Quote from seotrader:

Can you give me examples of other better strategies ?

It's not a question of better strategies. You have to select the strategy whose risk profile best suits your outlook for the underlying and whose R/R is in your comfort zone. Here are two links for a basic look at various strategies:

http://www.optiontradingtips.com/strategies/covered-call.html

http://www.numa.com/derivs/ref/os-guide/os-00.htm


Regarding to acen , in the beginning I was really excited it may work , but I got immediately disappointed big time after putting his positions on risk analyzer.

A risk analyzer would certainly demonstrate the fallacies in his post but a simple calc using the deltas posted would have gotten you in the ballpark quickly... unless you want to consider how much the VIX rises after gold drops $6 on a Tuesday after an economic report is released on the 2nd Monday unless IV is risng not bleeding but only if it's as a forum clown continually suggests :)
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One aspect that has not really been talked about is the "hedge" that is in the DITM call at $20k vs the stock position at $58k. Also a call is the equiv position of a stock with a protecting put.

Are we trying to do too much protection with the extra positions? I am not being critical, I just want to get a feel for how much safety vs. complexity is a good trade-off.

Also I think the aspect of wanting income and still wanting the potential for stock price appreciation adds an extra element of complexity.

Is GOOG the right underly for this strat? And is there a better strat to use with GOOG?

Also, seo, do you have a pre-planned exit for trade either at a loss or profit?


Be interested to know what others think about these points.
 
Quote from traderlux:

One aspect that has not really been talked about is the "hedge" that is in the DITM call at $20k vs the stock position at $58k. Also a call is the equiv position of a stock with a protecting put.

Are we trying to do too much protection with the extra positions? I am not being critical, I just want to get a feel for how much safety vs. complexity is a good trade-off.

Also I think the aspect of wanting income and still wanting the potential for stock price appreciation adds an extra element of complexity.

Is GOOG the right underly for this strat? And is there a better strat to use with GOOG?

Also, seo, do you have a pre-planned exit for trade either at a loss or profit?


Be interested to know what others think about these points.
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Hello tradelux

You are right , its better to buy the stock at margin.

And then buy the JAN11 580 and sell JAN11 500 puts ( the same protection I used before)

cost to the stock - 29,000$

break even - 615

if in JAN11 google between 500-580 - loss 3546$

if google drop before to 500 and we close the position - loss is between 3546$ up-to 6800$ ( depend how fast it happend ) .

I was trying to also use this protection instead

1. iron condor:

JAN11 640 (sell) -660 (buy) calls ( 10 contract)
JAN11 520 ( sell) - 500 ( buy) puts ( 10 contacts)

2. JAN11 580 PUT

The problem is that this protection is too complicated and risky for me

I'm long term investor that want to invest in moats like google,aaple, esi

I didn't want to buy/sell the stock using technical signals MCAD/MA and so...

I just wanted to hold it for the long run and collect monthly CC ( ok sometimes I will need to roll it up/out)


And because of that I wanted some normal cheap insurance that won't increase the break even point dramatically and won't be very expensive.

Selling the CC does not add much complex , I've been doing it in the last 3 month, but now I just realize I'm not protected enough so I closed my positions ( which I was really not happy to do) until I will find a better way to invest & protect my self.

Regarding to closing the trade - I do have a sell price that I will sell in case google reach this price.

The max loss were suppose to be 6000$.
 
Quote from traderlux:

One aspect that has not really been talked about is the "hedge" that is in the DITM call at $20k vs the stock position at $58k. Also a call is the equiv position of a stock with a protecting put.

My suggestion several pages ago was that you can reduce the risk in diagonals by buying a 4-6 month long leg instead of a far out man, LEAP. 3-4k is a lot less risky than $20k.

Are we trying to do too much protection with the extra positions? I am not being critical, I just want to get a feel for how much safety vs. complexity is a good trade-off.

Complexity is not a bad thing if you get something for it (less risk or more reward).

Also I think the aspect of wanting income and still wanting the potential for stock price appreciation adds an extra element of complexity.

Income and stock price appreciation are a trade off. If you want more income, your sold strike must be lower. That reduces hedge premium received as well as potential stk appreciation (and vice versa).

Is GOOG the right underly for this strat? And is there a better strat to use with GOOG?

The right underlying is the one where you get the timing and direction right. W/o knowing that then perhaps the next criterion might be getting some skew if involved in diagonals.

The price of the underlying is irrelevant since premium is linear, all else being constant. IOW, the same strategy (same IV, strikes relationships, etc.) on a $580 stk provides 10x the R/R as on a $58 stk.
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Quote from spindr0:

My suggestion several pages ago was that you can reduce the risk in diagonals by buying a 4-6 month long leg instead of a far out man, LEAP. 3-4k is a lot less risky than $20k.

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Can you give me an example of calender you can do?

I don't think you reduce the risk , but increase it

You will have less time to be right about the direction , and 3-4K loss in 6 months is like 8K loss in 12 month

I think also the break even point will be much higher.
 
Quote from seotrader:

Can you give me an example of calender you can do?
I don't think you reduce the risk , but increase it

You will have less time to be right about the direction , and 3-4K loss in 6 months is like 8K loss in 12 month

I think also the break even point will be much higher.
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No, I can't. I said diagonals not horizontals.

As an example, since IV's and intraday prices vary across the months and strikes, use a hypothetical IV of .25 to fairly price the Mar, Jun, Jan/11 and Jan/12 calls at 400, and 550 at an underlying price of 580. Now drop the price of the underlying to 550. Compare the losses on the different calls.

Even w/o a risk analyzer, you know you're going to take a beating on 400 strike long calls (~30 pts). The 550's will lose more percentagewise but their total dollar loss will be far, far less (<20 pts).

Now drop it to 500. The 400 calls will lose 70-80 pts. The 550 calls will lose 35-40 pts. Big difference. Nearly double.

However, the 550's will cost more in time premium. Question is, is that add'l cost worth it for avoiding that significantly larger potential loss? That's an individual decision.
 
Quote from spindr0:

No, I can't. I said diagonals not horizontals.

As an example, since IV's and intraday prices vary across the months and strikes, use a hypothetical IV of .25 to fairly price the Mar, Jun, Jan/11 and Jan/12 calls at 400, and 550 at an underlying price of 580. Now drop the price of the underlying to 550. Compare the losses on the different calls.

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I'm sorry but I'm kind of confused.
Can you write for me the positions :

what you SELL what you BUY , what strike and what month.

Thanks
 
Quote from seotrader:

Can you write for me the positions :

what you SELL what you BUY , what strike and what month.
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Compare these two:

Buy 1/11 400c, sell Dec 580c
Buy Jun 550c, sell Dec 580c
-----

Compare these two:

Buy 1/11 400c, sell Dec 590c
Buy Jun 550c, sell Dec 590c
-----

Compare these two:

Buy 1/11 400c, sell Dec 600c
Buy Jun 550c, sell Dec 600c
-----

Or use the Mar instead of Jun
Or use 500c instead of 550c
Whatever

Observe the trade offs b/t premium cost, potential stock appreciation and premium lost in a dive. Use hypothetical prices since you want to see the strategy's possibilities and not be sidetracked by market forces (different IV's, B/A spread, last trade)

There's no right answer... only what risk/reward profile helps you sleep better at night.
 
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