How do I manage Risk and Losses?

D

doublea

Just recently got interested in Options and have been reading more but I would like to ask people here regarding some of the things that I should be paying attention to.

Currently I'm trying this on a Paper-money account for practice. Here is my position.

Long ES Dec @ 1310
Short ES Oct 1320 C @ 15.

The worst case scenario is if the ES goes below 1295. What should I be looking here in terms of greeks; Delta, gamma, vega, IV?
How much will the premium decline in value as time passes?

Right now I'm doing this as a directional play. I beleive we are either going be in a range or slightly up here.

Any help appreciated.
 
Quote from doublea:

Long ES Dec @ 1310
Short ES Oct 1320 C @ 15.
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Looks like you have a covered call position there.

It is synthetically equivalent to a short PUT e.g.

Short ES Oct 1320 P

Unlimited downside. Capped upside.

So perhaps it's easier to consider how you would manage a short PUT position.

To cap the downside you could purchase a long PUT. This would result in a bull vertical: capped risk/capped reward.

The position decays in your favor as expiration approaches. The greek to watch for magnitude of decay is theta. Decay is greatest for ATM options.

I'll let others chime in with other thoughts...

Good luck.

MoMoney
 
Ok here are the scenarios that could take place.

ES trades above 1320 at exp. and I'll be called.

My profit will be 15+10 = 25 points.

ES trades between 1310 and 1320 at exp.

My profit will be 15 + Closing Price - 1310 = Atleast 15 points

Es trades between 1310 and 1295.

My profits will be 15 - 1310 + Closing Price = Less than 15 points

Es trades below 1295.

My loss will be 1295 - Closing Price = Unlimited

So, I'm thinking about liquidating my positions if the ES trades below 1295. I'm hoping that the Call will lose at least 2/3 of its value if ES goes below 1295.

So If I can buy the call back at 5, I'll be okay.
 
Quote from doublea:

So, I'm thinking about liquidating my positions if the ES trades below 1295. I'm hoping that the Call will lose at least 2/3 of its value if ES goes below 1295.
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Did you actually read anything that momoneythansens answered? Just regard the thing as a short put. You sold a put with strike 1320 for 15.00 premium. You decide to buy back the put when the underlyer reaches 1295. Nothing more, nothing less.

Ursa..
 
Quote from MajorUrsa:

Did you actually read anything that momoneythansens answered? Just regard the thing as a short put. You sold a put with strike 1320 for 15.00 premium. You decide to buy back the put when the underlyer reaches 1295. Nothing more, nothing less.

Ursa..
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I do not think it is same as being short 1320 P for 15 premium.

So if the ES settles at 1305 at exp, I'll breakeven if I sell 1320 P for 15.

But with my covered call, I'll actually be making:
15(premium received) - 5(loss in the ES) = 10 points if the ES settles at 1305.

Am I missing something here.

PS. I read what momoney had answered.
 
Quote from doublea:

Am I missing something here.
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It must be synthetics day here on ET!

You can take it as read that:

long futures + short CALL = short PUT

If you think about it intuitively, this makes perfect sense. Your covered call has unlimited downside and capped upside - these are the same characteristics as a short PUT.

If you went short the 1320 PUT instead the premium you'd get from it would be roughly:

1320 - 1310 + 15 = $25

Now run your break-even scenarios again LOL.

I don't have pricing in front of me but you can check to see the premium for writing the 1320 PUT yourself.

The risk profile of your covered CALL and the short PUT will be the same, providing of course you wrote the CALL at roughly the same time as you went long ES.

Good luck!

MoMoney
 
Quote from momoneythansens:



I don't have pricing in front of me but you can check to see the premium for writing the 1320 PUT yourself.
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I think its the difference in put/call pricing that is throwing the OP off. Thinking he is getting a better deal(selling the covered call which has higher premium away from expiry) vs the the straight up naked put, not realizing all along he is paying that difference carrying the long futures.
 
Quote from momoneythansens:

It must be synthetics day here on ET!

You can take it as read that:

long futures + short CALL = short PUT

If you think about it intuitively, this makes perfect sense. Your covered call has unlimited downside and capped upside - these are the same characteristics as a short PUT.

If you went short the 1320 PUT instead the premium you'd get from it would be roughly:

1320 - 1310 + 15 = $25

Now run your break-even scenarios again LOL.

I don't have pricing in front of me but you can check to see the premium for writing the 1320 PUT yourself.

The risk profile of your covered CALL and the short PUT will be the same, providing of course you wrote the CALL at roughly the same time as you went long ES.

Good luck!

MoMoney
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Makes more sense. Thanks.
 
Quote from momoneythansens:

It must be synthetics day here on ET!


MoMoney
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Well, it was greeks day a while back and now it 's time for a change :)
Thanks for your replies.
Best
daddy's boy
 
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