Quote from chrismontez:
I disagree. This is the option strategy forum, not the risk management forum. The man didn't open a $40,000 position, he got there by averaging down and now he comes to this forum looking for INTELLIGENT advice on strategies for dealing with this situation and he's told to take the loss and gets a lecture on risk management. Plus now he's sitting on 10 naked calls because that's easier to manage??? Where's the management ??? There were a number of damage control strategies that could have been recommended that would have at least given him some useful knowledge on for his $ with the potential to trade out of this with a profit. If nothing else, I think he could have rolled out his calls and set up a delta neutral position either shorting the stock or setting up a synthetic short position.
As for risk management, let's say he is an experienced stock trader sitting on a 4 million dollar account and he put 10% of his account into this trade( $400,000 worth of stock) with a protective stop at 10% . He would only be risking 1% ($40,000) of his account on this trade. Most people would call that proper risk management, even though he is risking the same amount of $ as he is on these 40 calls.
You make a good point although I still think someone with $4 million throwing $40,000 into options without any knowledge is still reckless in theory and you cannot defend a position simply because the full loss would be a drop in the bucket.
As for the current position I do not think he is naked 10 calls as that would truly be reckless. I think he is now long 10 bull call spreads with a chance to make some money if LEH gets to $70 by expiration (do not know the actual expiration breakeven).
However the key underlying fact is that when you go long options and the stock drops, there is no magic adjustment to turn a loser into a winner otherwise where would the risk be. The underlying stock still has to cooperate by moving in the expected direction. So it is not as easy as simply telling the person to do X or Y and the position is fixed or cured.
A lot of it depends on where the stock is at the time and where the person now expects it to move to by expiration.
To follow your advice we can work back from the original position and suggest some adjustments based on diferent expectations of where the stock will move to in the near future or at least by expiration.
But you have to admit, that if the OP does not know about options andis a newbie then explaining adjustments will not help the situation because they still are not learning the basics of option pricing, time decay, volatility, and the Greeks which are needed to understand how to put on a good option position and even more so how to understand the potential adjustments.
So before explaining adjustmetns I stil advise the newbie take some time to work on the basics and understand options with access to a lot of helpful people here to learn how to better use options for trading and investing and even for possible adjustments. But we cannot gloss over the lack of knowledge and simply provide a band aid for the current positions.
You know the whole give a man a fish or teach him to fish analogy. I would rather he learned to fish then was simply told where to get the one fish for now which will save him way more money in the future and even make him some money if he learns the proper b asics.
Happy new year..
