looking for solicited advice

weewilly · Jun 29, 2009

Quote from thebubs:

Relatively new to options but have had some early success with them, maybe beginners luck. Anyway here is my scenario looking for some advice.

Monday bought MRK jul 27.50 calls for 10c, they shot up to 35c yesterday- whats the best plan of action
a. just sell now take the quick profit
b. buy the july 24 put for 15c to play the swing if it goes back down
c. hold tight- be a pig a little longer

There are many more things you could do (beyond the three things you mentioned) when faced with the happy problem of having long calls moving in your favor.

Another possibility is selling half as many itm calls, e.g. at the 26 strike to create a backspread with less-than-zero risk. You bought the 27.50 for a .10, you can sell half as many 26c for about 2.00, creating a call backspread for a 1.80 credit where the max risk is 1.50. Yummy.

TraderZones · Jun 30, 2009

Quote from erol:

anyone see anything wrong with this strategy? (aside from getting hit on the spread)

I've had small successes with ITM options (delta ~ 0.65 - 0.75) with 3-4 months left.

...

Is this a loser strategy long term?

If you don't have a serious edge, then just because something "has been working" does not mean it is valid.

Some peolpe write/sell options for years, under the belief that "90% of all options expire worthless." Then one day, they get hammered and give back years worth of profits, when all they were doing was playing a game that wins 90+% of the time, but the 10-% of times it loses, it removes all the profits.

But there is nothing inherently profitable about any mechanical strategy. Option Market pricing, decays, time, etc. is amazinlgy efficient most of the time. What looks like a simple strategy usually has some unforeseen aspect a "trader"is not considering.

dagnyt · Jun 30, 2009

Quote from erol:

I've had small successes with ITM options (delta ~ 0.65 - 0.75) with 3-4 months left.

I go for 20% - 30% return on premium, then get out.

Is this a loser strategy long term?

thanks!

Question for you:

Were all of your plays buying calls in a rising market?

If yes, then you know this idea has zero viability long-term.

Mark

erol · Jun 30, 2009

thanks for the replies.

Mark: The underlying (Canadian Oil Sands on TSX - COS.UN) was moving sideways,

But yes, either up or sideways...

thebubs · Jun 30, 2009

I would like to thank wewilly for his advice on a strategy going forward. I may not have been clear, but what I was meaning to ask is: what strategies do people use in situations like mine, you have a succesful option trade going do you simple get out and take the profit or by downside protection or what? It really is irrelevent if you like the trade or not most people only like there own trades anyway. What I meaning to ask is what people do to lock in a profit on success or risk downside besides just selling the option. Again thanks wewilly for your two cents-those are the kind of ideas I was hoping for

spindr0 · Jun 30, 2009

Quote from erol:

anyone see anything wrong with this strategy? (aside from getting hit on the spread). I've had small successes with ITM options (delta ~ 0.65 - 0.75) with 3-4 months left. I go for 20% - 30% return on premium, then get out. Underlying has to move typically $2 - $3 (the ones I trade). Is this a loser strategy long term? I want to get into spreads but need to understand them more, so I'm doing this now...

Speaking in generalities, the success of a strategy is usually dependent on selecting the appropriate one for your outlook as well as the environment you're in plus managing the position whether it gets ahead or behind.

There's nothing wrong with your parameters as long as you're finding situations where it succeeds. When they don't, you have to take a hard look at why and consider if another strategy would be better.

spindr0 · Jun 30, 2009

Quote from thebubs:

I would like to thank wewilly for his advice on a strategy going forward. I may not have been clear, but what I was meaning to ask is: what strategies do people use in situations like mine, you have a succesful option trade going do you simple get out and take the profit or by downside protection or what? It really is irrelevent if you like the trade or not most people only like there own trades anyway. What I meaning to ask is what people do to lock in a profit on success or risk downside besides just selling the option. Again thanks wewilly for your two cents-those are the kind of ideas I was hoping for

Yep, weewilly's replies were well thought out and covered a number of possibilities.

There isn't a cookie cutter answer to your question. What one does going forward depends on your outlook for the underlying as well as your reward objective versus risk tolerance (fear and greed).

Sometimes it's useful to play with a risk graph, adding or subtracting legs to see if you can shift the risk graph to something more attractive. What that is might be different for everyone.

erol · Jul 1, 2009

thanks spindr0

I guess I never thought of "managing" it if the underlying tanks.

I suppose I could turn it into a bear call spread depending on how much it tanks.

thanks again!

spindr0 · Jul 1, 2009

Quote from erol:

I guess I never thought of "managing" it if the underlying tanks.

I suppose I could turn it into a bear call spread depending on how much it tanks.

You can turn it into a lot of things and it's important to know what those things are. Or maybe you just tweak the position a bit in order to shift the risk graph bit. But don't wait for a tanking to act/react.

One of the things that Mark W posts and that I seriously agree with is that risk management is far more important that choosing a strategy. You have to protect your principal in order to survive.

I have a meat and potatoes approach to option. I'm no quant. I have no lock on what an underlying might do but I surely know a fair amount of what I can do to give myself a decent chance to profit... or avoid serious losses. I guess it might be better described as being like a bookie. You lay off part of the bet so that the bet never kills you if you're wrong.

IOW, if a spread gets ahead, if you want to stay in it, take off some risk, add some more protection, write the other side (turn it into an iron condor or calendar strangle). Adjust positions to keep their risk profile in your comfort zone.

erol · Jul 1, 2009

.....But don't wait for a tanking to act/react.

One of the things that Mark W posts and that I seriously agree with is that risk management is far more important that choosing a strategy. You have to protect your principal in order to survive.

That's a delicate balance I have to learn. Since it's hard to sit there and watch the price go down, but I believe (when I've been long the call) that it'll come back, and it has.

But had I reacted I would have put myself in a more complicated position... its hard to find that balance of

"okay, it's down but it'll come back up"

to

"oh, it's down, and it doesn't look like it'll recover"

Any of the books I've read (granted they're geared towards value investing and long term horizon) preach 'you get killed when you trade often'. I can see this being true, the problem is when the market moves down significantly, that's when I would get caught with watching the price move.

I was long a 45 ITM Call on CM, and it wasn't moving. So to reduce my exposure, I closed the position about a week ago. Had I waited until today, I could have closed with a small profit after commissions.

I guess it's something I have to learn, balancing between letting the price move to adjusting my position (in addition to options).

Thanks for your input. My apologies for the hijack!