Morphing a covered call into a short strangle

[Stymie]

Greetings,

Despite my lack of experience, the trades have been profitable. I closed out my strangle and some of my other positions at a 75% return on risk.

Finally, I have one position that expires Friday and I haven't thought of a way to squeeze more juice out of it. Perhaps you have an idea: Early March I bought 1000 stock @ 5.60 and sold 6 covered calls @1.33 expiring 3/17.

I've looked at rolling forward and/or up but nothing much seems appealing since it would turn a winning trade into maybe a better trade. Are there other clever ways to make this more profitable?

Once the extrinsic was gone from my short straddle, I put a bid in for cheap and was hit so I'm out of $BCRX for a nice profit. My suggestion is to move on to another situation where the stock is cheap and vols are high.

I just took a big profit in TGTX and rolled that into accumulating AXON. They have seven trials due this year. I bought the stock and sold the twenty five straddle in Sept for twenty two dollars. I will own more stock at three or out at fifty . They could trade above hundred if trials succeed so don't be exposed to the upside! I'm looking at three hundred percent return as max. The vol skew is flat so go out as far as possible.

 

[Libranalysis]

Just looked at AXON and placed a similar trade. Thanks for the tip. The trade can even be set so there's zero risk on the put side. However, I don't see the stock going to zero so setting the strike provides more protection on the upside.

Here's a question: Why buy the stock? If you wanted upside protection, couldn't you buy a synthetic call that's delta neutral after the stock starts to climb? (say at 40)?

 

[Stymie]

There are two issues when buying a call versus the stock.

1. The strategy is built around high volatility and the out of the money calls are the most expensive.
2. When the trials are announced, the stock will spike and by the time the markets open it will be too late to buy a call to hedge. The new strikes will only be published a day after so too late to cover upside risk if it blows up to new highs. Today, 30 is the highest strike. No such thing as managing deltas in chaos.

In fast markets, you won't be able to buy anything at a fair price. That's just reality. I have learned not to be the victim of volatility. I'm exposed to the downside at zero. That's it. The rest is gravy. If you can sell 15 straddles for 18 dollars than you make 3 dollars if it goes to zero. But be careful to upside as this could go to 150 like other similar stocks. That's the upside risk so model against that.

 

[ironchef]

There are two issues when buying a call versus the stock.

1. The strategy is built around high volatility and the out of the money calls are the most expensive.
2. When the trials are announced, the stock will spike and by the time the markets open it will be too late to buy a call to hedge. The new strikes will only be published a day after so too late to cover upside risk if it blows up to new highs. Today, 30 is the highest strike. No such thing as managing deltas in chaos.

In fast markets, you won't be able to buy anything at a fair price. That's just reality. I have learned not to be the victim of volatility. I'm exposed to the downside at zero. That's it. The rest is gravy. If you can sell 15 straddles for 18 dollars than you make 3 dollars if it goes to zero. But be careful to upside as this could go to 150 like other similar stocks. That's the upside risk so model against that.

The discussions between you and Libranalysis are very interesting and helpful. Thanks to both of you.

Regards,

 

[Libranalysis]

Appreciate the reply. I talked to TDA about the synth call hedge as well. They agree the idea is theoretically good but may suffer from the realities you describe.

Here's an interesting twist on this particular trade: July IV is less than half of both the following months for some reason. 30 calls are only .35-.85, so I'll be buying those which gets me hedged through July. Over the next month or two, I'll figure out how to hedge out to the Sept expiration.

There are two issues when buying a call versus the stock.
1. The strategy is built around high volatility and the out of the money calls are the most expensive.
2. When the trials are announced, the stock will spike and by the time the markets open it will be too late to buy a call to hedge.

In fast markets, you won't be able to buy anything at a fair price.

 

[Stymie]

Appreciate the reply.

Here's an interesting twist on this particular trade: July IV is less than half of both the following months for some reason. 30 calls are only .35-.85, so I'll be buying those which gets me hedged through July. Over the next month or two, I'll figure out how to hedge out to the Sept expiration.

The vols reflect the binary events. Until read out, this stock will drift up so you want static Long deltas and no theta decay for your hedge. Why not do both strategies and your pnl will make it clearer for you over time.

 

[Libranalysis]

My concern with holding the stock is trial failure. Losing on the stock at the same time the straddle declines in value does not sound appealing, but I'll rethink it. . .

 

[Stymie]

My concern with holding the stock is trial failure. Losing on the stock at the same time the straddle declines in value does not sound appealing, but I'll rethink it. . .

Trade size is critical so model it for the possibility at zero by year end. But the high vols will guarantee a big move. This will always happen as those big bets unwind. There is zero chance of being unchanged. That's why I like the directional straddles by moving away from ATM. So I did a 25 Straddle instead of the 15 Straddle. That moves the cap from 33 to 50 on the stock at expiry. If the Stock rallies beforehand, there will be an opportunity to take profit early as it moves towards the strike. There is a point where you don't want to wait for the results as the risk downwards is too high. Take the money and move on.