We just crossed the strike... What's the plan?Here's trade which makes more than 6% at expiration on this Friday:
Ticker=VRX LastSpot=28.84 tmLastTrade=20160606-195959 Expiry=2016-06-10
PL=6.12% based on CostBasis (ie. MarginReq) CostBasis=4.90(16.99%)
Pos1/1 Put-Short Strike=23.00 Premium=Credit=0.30 MarginReq=4.90(16.99% of spot) S2K=-5.84(-20.25%)
Be careful: it releases today (Tue) its quarterly ER...
The above trade is safe as long as the underlying spot doesn't fall more than 20.25% till Friday's close.
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Making Money is Easy
- Thread starter frostengine
- Start date
Venezuela...no extradition treaty.
No electricity either, I heard...
Such swings shortly after Earnings Report release are normal and expected.
Currently the underlying spot (and the trade) is again in the profit zone (curspot 25.41).
If it from now on falls below the strike (23.00) then one of course would need to hedge the position by shorting the stock.
But I think it won't be necessary till expiration on Friday.
What would you instead have done?
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Making money is easy, but keeping it is the hard part and why risk management is the hardest part of trading. How much of the backfill, losing money, is acceptable based on the "norm" for that instrument before it may continue to trend. This is where you can hedge open profits as an insurance as no one knows where a retracement may turn back around or make new trend.
I have no idea. I never sell options when the argument is "it won't ever get there".Such swings shortly after Earnings Report release are normal and expected.
Currently the underlying spot (and the trade) is again in the profit zone (curspot 25.41).
If it from now on falls below the strike (23.00) then one of course would need to hedge the position by shorting the stock.
But I think it won't be necessary till expiration on Friday.
What would you instead have done?
Just out of curiosity, why would one need to hedge "from now on" and not from yesterday, when VRX fell below the strike?
I already gave the reason: because of the ER...
And nobody has stated that it never would get there. Usually one would hedge as said.
To be sure I understand you correctly... Your methodology suggests that, once earnings are released, one should hedge if the underlying breaches the strike? Does that mean you hedged yesterday?
no, that's 'nuff discussion with you!
you seem not even to understand the most obvious things said...
and: I personally have not entered that trade; it was just a trade idea my scanner had found...
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Martin is asking you a good question. And it's the biggest rub with selling 5 delta crap. If you hedge at the onset, you likely make no money on the trade. But suddenly the stock craps out and vol explodes and now you hedge? How exactly do you hedge that? If you sell stock down at the short strike and it reverses all of its gains, you lose 10X the .30 you made selling the short put. If you try to buy puts to hedge, you pay a fortune. If you sit and do nothing, well, get your paperwork in order to pay a visit to the welfare office. The bottom line is, we can't hedge anything after the fact just as I can't insure my house after the fire has burned it down. You have to hedge before and therein lies the rub. You just haven't really thought this through.