Let profits running

SuperBanda · Sep 20, 2007

Hi guys,

I would like to get your view about a straight option purchase that is giving a nice profit.

I make an example to clarify

day 1 - stock @ 100 - bought 1 call strike 90 - 6 months for expiry - price paid 13

day 20 - stock @ 115 - current call bid 26 (so a nice 100% profit)

If you believe that there is still some upside potential, but at the same time you want to cash/protect some of the profits, what is the best approach?

Thanks in advance.

MTE · Sep 20, 2007

Quote from SuperBanda:

Hi guys,

I would like to get your view about a straight option purchase that is giving a nice profit.

I make an example to clarify

day 1 - stock @ 100 - bought 1 call strike 90 - 6 months for expiry - price paid 13

day 20 - stock @ 115 - current call bid 26 (so a nice 100% profit)

If you believe that there is still some upside potential, but at the same time you want to cash/protect some of the profits, what is the best approach?

Thanks in advance.

Selling half the position is one alternative, but since you only bought 1 contract, it's not possible.

Another alternative is to sell a higher strike call with the same expiry. By doing this you'll convert the long call into a vertical, lock in a profit and still have some upside.

commiebat · Sep 20, 2007

Quote from SuperBanda:

day 1 - stock @ 100 - bought 1 call strike 90 - 6 months for expiry - price paid 13

day 20 - stock @ 115 - current call bid 26 (so a nice 100% profit)

That's every call buyer's dream "problem".

You think there's more upside available now, but do you think the stock will stay up for five more months? If you do, a fun little adjustment would be to write whatever call is trading at $13 right now. You'll get all your money back, and you'll have a free vertical spread you can just sit on until expiry.

If you think the upside is shorter-term, you can write shorter-term calls around where you think the upside is, and keep on writing every month as long as your outlook stays the same. Don't worry too much about being assigned early, since your long leg has almost no time premium left.

Selling to close out your position is always an option. A 100% profit in 3 weeks is not too shabby.

Buy1Sell2 · Sep 20, 2007

Quote from MTE:

Selling half the position is one alternative, but since you only bought 1 contract, it's not possible.

Selling half of a position is never a good alternative. If half is to be sold, then the whole should be sold. Best bet is to hold your position if you feel there is room to the upside. If you don't feel that there is, then sell the whole position. Thank you for your time.

taowave · Sep 20, 2007

Quote from SuperBanda:

Hi guys,

I would like to get your view about a straight option purchase that is giving a nice profit.

I make an example to clarify

day 1 - stock @ 100 - bought 1 call strike 90 - 6 months for expiry - price paid 13

day 20 - stock @ 115 - current call bid 26 (so a nice 100% profit)

If you believe that there is still some upside potential, but at the same time you want to cash/protect some of the profits, what is the best approach?

Thanks in advance.

Sell a vertical spread and roll your option up,i.e the 90 /110..

Sell a vertical spread and sell an additional call so you are now long a call spread

Or simply buy a put/put spread at whatever strike you like,i.e 110

taowave · Sep 20, 2007

Quote from Buy1Sell2:

Selling half of a position is never a good alternative. If half is to be sold, then the whole should be sold. Best bet is to hold your position if you feel there is room to the upside. If you don't feel that there is, then sell the whole position. Thank you for your time.

B1S2,
As i have debated this topic wth you before regarding cash instruments,I would strongly disagree with you regarding option trading.

Your rigid stance on not "selling half" implies you should not sell some of your deltas if you are an option trader.That would dismiss buying a put,selling a call or rolling the position up.

commiebat · Sep 20, 2007

Quote from taowave:

Your rigid stance on not "selling half" implies you should not sell some of your deltas if you are an option trader.That would dismiss buying a put,selling a call or rolling the position up.

I don't think you can generalize to that extent.

I'm also not a fan of selling half a position. You either believe in the position or you don't. If you believe, hold. If not, close.

With options, adjusting the position creates a whole new risk profile. You're not just long or short, you might be long up to 80 and short from 90 to 100, or whatever. You may like the adjusted profile even though you weren't crazy about the original one. Option positions should absolutely be adjusted if your outlook justifies it.

spindr0 · Sep 20, 2007

If you believe that there is still some upside potential, but at the same time you want to cash/protect some of the profits, what is the best approach?

There is no best approach since you don't know what the future is going to bring.

Converting to a call vertical spread or selling bullish put spreads is a good idea if the stock ends up leveling off. Rolling up is a good idea if the stock tanks. Doing nothing is a good idea if the stock powers up. And of course, there's never anything wrong with selling to close and taking a double in 3 weeks.

But if you are intent on staying long, the object of adjusting is to give yourself some add'l profit potential while taking in enough premium to recover your seed money so that in the worst case scenario, you lose nothing because you are playing with someone else's money.

taowave · Sep 20, 2007

Quote from commiebat:

I don't think you can generalize to that extent.

I'm also not a fan of selling half a position. You either believe in the position or you don't. If you believe, hold. If not, close.

With options, adjusting the position creates a whole new risk profile. You're not just long or short, you might be long up to 80 and short from 90 to 100, or whatever. You may like the adjusted profile even though you weren't crazy about the original one. Option positions should absolutely be adjusted if your outlook justifies it.

Its not really a generalisation.If one unequivocally states that one shouldnt sell half the position,than one would have to believe that rolling ones position from a delta of 90 to 45(selling the vertical) is not prudent as well...

Your example is short gamma,and thats not an option,no pun in- tended

commiebat · Sep 20, 2007

Quote from taowave:

If one unequivocally states that one shouldnt sell half the position,than one would have to believe that rolling ones position from a delta of 90 to 45(selling the vertical) is not prudent as well...

Just because you're halving your delta, that doesn't mean you've halved your position.

Selling the vertical creates a new position that happens to reduce delta, but more importantly changes the price range in which you will realize a profit or loss.

Supposing you owned two Dec 90 calls. Surely you'll agree there's a big difference between the following three adjustments:

1) Sell one Dec 90 call
2) Sell two Dec 110 calls
3) Sell two Oct 110 calls

To take an absurd example, a person might leg into a vertical spread, all in one day. Surely you don't consider that to be "selling half" of the first leg.