Natenberg strategy

[steve0580]

For some reason, I can't seem to get this straight in my head.

Yes, I know this is elementary but hopefully someone can clear this up.

Page 25, here's the position:

Long 1 March 95 call at 5.50

Short 3 March 105 calls at 1.15

Net debit is 2.05

According to the book, if the underlying finishes at 95, both the 95 and the 105 calls with be worthless.

My problem is: How can the 105 calls be worthless at 95?

If you're short 3 105 calls and the underlying finishes at 95, couldn't you be forced to exercise the purchase of 300 shares of the underlying at 105?

Wouldn't this be a loss of $3000?

Underlying at 95, you're forced to exercise buying 10 points above the price at expiration?

I understand the the long 95 is worthless at expiration at 95. On top of the 3000, since the position was initially established at a 2.05 debit, wouldn't your total loss then be 3205?

 

[theTaoTrader]

Quote from steve0580:



If you're short 3 105 calls and the underlying finishes at 95, couldn't you be forced to exercise the purchase of 300 shares of the underlying at 105?

Why do you think the buyer of the 3 105 calls want to buy the underlying at $105 from you when the market is at $95?

 

[sharkbites]

Quote from steve0580:

For some reason, I can't seem to get this straight in my head.

Yes, I know this is elementary but hopefully someone can clear this up.

Page 25, here's the position:

Long 1 March 95 call at 5.50

Short 3 March 105 calls at 1.15

Net debit is 2.05

According to the book, if the underlying finishes at 95, both the 95 and the 105 calls with be worthless.

My problem is: How can the 105 calls be worthless at 95?

If you're short 3 105 calls and the underlying finishes at 95, couldn't you be forced to exercise the purchase of 300 shares of the underlying at 105?

Wouldn't this be a loss of $3000?

Underlying at 95, you're forced to exercise buying 10 points above the price at expiration?

I understand the the long 95 is worthless at expiration at 95. On top of the 3000, since the position was initially established at a 2.05 debit, wouldn't your total loss then be 3205?

Short 3 March 105 calls at 1.15

He sold the obligation to deliver the stock for 105 by the expiry date. The stock closed at 95 on expiry day. At or bellow the strike prices, the calls expire worthless.

The counter party of the transaction can acquire the stock at the open market for 95 why would they want to take delivery for 105?

 

[steve0580]

I kept picturing this as selling puts, rather than calls.

My own idiocy..

Thanks....

 

[ifreebird]

Well, seems you do not fully understand the basics of options. I suggest that you read easier book to get started.

But I'd like to answer your questions:

A call is the right, not the obligation to buy stock at the strike price an any time before expriation. If you buy a call, you are long. If you sell the call, you are short.

If stock close at 95, 95 strike options is worthless in the sense that the long options can buy the stock directly at 95 rather than exercise the call to get the stock. But sometimes, people do exercise their calls in this situation. This is called pin risk.

a 105 call is the right to buy stock at 105 from the option sell. If stock is trading 95, you don't want to buy at 105, do you? So it is completely worthless at expriation. It would be silly to exercise such a call. Actually nobody seems doing that.



Hope it helps.

 

[steve0580]

Thanks again for the responses and I feel like a complete idiot for posting that. For some reason, I kept picturing it as selling puts, instead of calls.

It's obvious to all that I am an amatuer but am making the effort to learn. The reason that I am trying to go the Natenberg route is because it seems that everyone considers this the "bible" of option trading, with the possible tossup being the McMillan "options as a strategic investment". What I posted was in the elementary strategy section and if I can't grasp that, I should give it up altogether.

My only options experience has been buying puts and calls. I've only traded spreads in a virtual account through optionsxpress. While I have a small account, my entire experience trading real options has not been entirely unsuccessful. I'm still licking my wounds from where I got battered on high risk covered calls last year due to my inexperience.

While I do have some successful stocks in my portfolio, my trading capital for options has been reduced, so I've decided that before I risk any capital again, I will try to educate myself the best I can.

I'm starting the way I guess most do. Start with puts and calls, move on to spreads and finally condors and butterflies. I do have a grasp of the greeks but it seems the single most important strategy, aside from understand the option spreads themselves, is volatility. Am I correct in this assumption?

 

[mlipsky]

advice and I beg you to heed it: when you start trading, do it out of the money with 1 x 1 spreads in the same month. do this for at least a year. the risk reward will be easy to picture and you won't lose your hard-earned $ in the complexity.