Starting a journal of my trades with the main goal of getting advice and comments so I can learn to be a more profitable and less risky trader. I am very new to options, although I have done countless hours of studying and reading several options classics, and continue to virtual trade strategies to where I understand them. I am very undercapitalized so I trade single contracts, and my main goal is to not lose any money. Currently, I have a 12.50/15 NOV put credit spread on TELK which I opened for a net credit of .40 There is support at the 15 level. Max risk is $190. Max ROI is 21%. If TELK moves down towards my strike, I will consider opening a bear call spread to further decrease my risk.
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Newbie options journal
- Thread starter backflip
- Start date
Just bought a put to lock in gains from a covered write on NITE. Originally bough NITE at 17.50 and sold a Oct 17.50 call for 1.15. Just bought the Oct 17.50 put for .35 to lock in gains. If NITE drops I may be able to make a small profit on the put, but my main objective was to take the risk out of the trade. After commissions I locked in a gain of $70. ROI is currently (70/1750-70)=4% for about one month.
Suggest you PM a moderator to move this over to the Journals section?
Quote from backflip:
Currently, I have a 12.50/15 NOV put credit spread on TELK which I opened for a net credit of .40 There is support at the 15 level. Max risk is $190. Max ROI is 21%. If TELK moves down towards my strike, I will consider opening a bear call spread to further decrease my risk.
If TELK moves down and you open a bear CALL spread that will result in an iron condor if my understanding of your position is correct.
That means you will have legged into the iron condor for less than fair value i.e. if you went into the market to open the iron condor from scratch you will get a better price than the one you have achieved. What this implies is that this adjustment strategy is not neccessarily a good idea.
Quote from backflip:
Just bought a put to lock in gains from a covered write on NITE. Originally bough NITE at 17.50 and sold a Oct 17.50 call for 1.15. Just bought the Oct 17.50 put for .35 to lock in gains. If NITE drops I may be able to make a small profit on the put, but my main objective was to take the risk out of the trade. After commissions I locked in a gain of $70. ROI is currently (70/1750-70)=4% for about one month.
You may or may not be aware that a covered write is synthetically equivalent to a naked PUT.
If you bought stock and wrote CALL at the same time, then you were perhaps better off just writing the OCT 17.50 PUT instead.
As for subsequently buying the OCT 17.50 PUT, you have just executed a conversion (long stock + short synthetic stock). It is a locked position. You don't make any extra money if NITE drops or rallies.
All of the above is equivalent to:
1) Writing OCT 17.50 PUT.
2) Stock goes up, thus gains on PUT
3) Buy back OCT 17.50 PUT
4) Bank profits.
Good point, is there a better adjustment that could be made short of closing out the position for a loss if the short strike is violated? The bear call spread was kind of a last resort to lessen the loss on the put spread. I would probably let myself be assigned if I thought a bounce was probable.
Quote from momoneythansens:
If TELK moves down and you open a bear CALL spread that will result in an iron condor if my understanding of your position is correct.
That means you will have legged into the iron condor for less than fair value i.e. if you went into the market to open the iron condor from scratch you will get a better price than the one you have achieved. What this implies is that this adjustment strategy is not neccessarily a good idea.
Is it not easier to adjust a covered write that is going against you than a naked put? With a covered write, I have the option to roll down, or out a month and down, and it seems that with puts it is much more difficult to roll down or out and down and still have profit potential. Also, with a covered write, I have the oppurtunity to buy back the call if the stock drops, and sell it again if the stock bounces for more profit--this adds more risk I know, but with a naked put this oppurtunity does not exist. Please comment as I am still learning.
Quote from momoneythansens:
You may or may not be aware that a covered write is synthetically equivalent to a naked PUT.
If you bought stock and wrote CALL at the same time, then you were perhaps better off just writing the OCT 17.50 PUT instead.
As for subsequently buying the OCT 17.50 PUT, you have just executed a conversion (long stock + short synthetic stock). It is a locked position. You don't make any extra money if NITE drops or rallies.
All of the above is equivalent to:
1) Writing OCT 17.50 PUT.
2) Stock goes up, thus gains on PUT
3) Buy back OCT 17.50 PUT
4) Bank profits.
Quote from backflip:
Is it not easier to adjust a covered write that is going against you than a naked put? With a covered write, I have the option to roll down, or out a month and down, and it seems that with puts it is much more difficult to roll down or out and down and still have profit potential. Also, with a covered write, I have the oppurtunity to buy back the call if the stock drops, and sell it again if the stock bounces for more profit--this adds more risk I know, but with a naked put this oppurtunity does not exist. Please comment as I am still learning.
Sure, let's assume that synthetic equivalents can be substituted for the real thing at any time. At all points on the risk map they are identical.
Let's say you did your covered write. Now, when you aren't looking, I sneak into your account and switch your covered write position with a naked PUT.
Pretend that you don't look at your existing portfolio to make any trading decisions moving forward. Instead you look at the stock price and options chains to see current values of various options. Hope you're still with me.
Now, looking at your adjustment strategies that you outlined: Say you want buy back the call if the stock drops and sell it again on a bounce. What steps do you take?
1) Buy CALL on dip.
2) Sell CALL on bounce.
There's nothing to stop you performing these two trades regardless of what is in your portfolio. In fact, you don't know that you are simply buying a CALL rather than buying back a short CALL. It's the same trade.
With a covered write, when you buy back the CALL you are left with long stock.
With a naked PUT when you buy the same CALL you are left with synthetic long stock.
i.e. you are left with two synthetically equivalent positions. As we have already established the two positions are interchangeable.
If you perform the same action to both positions, you will be left with two further synthetically equivalent positions and so on...
In short, whatever adjustment strategy you have in mind for the covered write can be applied exactly the same way to the naked PUT.
Why is this helpful? When you view the covered write as a naked PUT it becomes obvious that a drop in the stock actually harms the position. It doesn't help it. Although you are realizing a gain in the short CALL (I presume that is the motivation for buying it back), you are losing much more in the stock. Overall there will be a net loss. Buying the CALL then turns the position very bullish (long stock).
Hope that helps.
MoMoney.
>> Just bought a put to lock in gains from a covered write on NITE. Originally bough NITE at 17.50 and sold a Oct 17.50 call for 1.15. Just bought the Oct 17.50 put for .35 to lock in gains. If NITE drops I may be able to make a small profit on the put, but my main objective was to take the risk out of the trade. After commissions I locked in a gain of $70. ROI is currently (70/1750-70)=4% for about one month. <<
As mentioned by momoney, the Oct 17.50 covered call (CC) is synthetically equal to a naked Oct 17.50 put. By buying one Oct 17.50 put, you have morphed into a conversion which has locked in the .80 gain. You now have a long synthetic Oct 17.50 naked put and one long Oct 17.50 put which means you make nothing more than .80 nomatter how high the stock soars or drops. If that was your objective, rather than adding another leg and two more commissions, you should have just closed the position.
The conversion, there's no possibility of additional gains or losses unless you trade out of part of the position. it then reverses and you can restore that leg at a better price.
Occasionally, I end up with a conversion (or a reversal) on a position and I attempt to trade the stock intraday, restoring the conversion/reversal by 4 PM and carrying no overnight risk. The reason for trading the stock is that it's usually more liquid, has tighter spread and has a delta of 1.00, give or take, probably twice the delta of either option. Should it be your objective, this is a good way to improve day trading skills. One improved, skip the arb position and just trade the stock :->)
As mentioned by momoney, the Oct 17.50 covered call (CC) is synthetically equal to a naked Oct 17.50 put. By buying one Oct 17.50 put, you have morphed into a conversion which has locked in the .80 gain. You now have a long synthetic Oct 17.50 naked put and one long Oct 17.50 put which means you make nothing more than .80 nomatter how high the stock soars or drops. If that was your objective, rather than adding another leg and two more commissions, you should have just closed the position.
The conversion, there's no possibility of additional gains or losses unless you trade out of part of the position. it then reverses and you can restore that leg at a better price.
Occasionally, I end up with a conversion (or a reversal) on a position and I attempt to trade the stock intraday, restoring the conversion/reversal by 4 PM and carrying no overnight risk. The reason for trading the stock is that it's usually more liquid, has tighter spread and has a delta of 1.00, give or take, probably twice the delta of either option. Should it be your objective, this is a good way to improve day trading skills. One improved, skip the arb position and just trade the stock :->)
Quote from backflip:
Is it not easier to adjust a covered write that is going against you than a naked put? With a covered write, I have the option to roll down, or out a month and down, and it seems that with puts it is much more difficult to roll down or out and down and still have profit potential. Also, with a covered write, I have the oppurtunity to buy back the call if the stock drops, and sell it again if the stock bounces for more profit--this adds more risk I know, but with a naked put this oppurtunity does not exist. Please comment as I am still learning.
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Whatever you do with calls can be done with puts and/or stock. Regardless of whether your initial position was a CC or a NP, you can buy the Oct 17.50 call in both cases (to close with the CC and to open with the NP) and still have the same result. If you aren't familiar with synthetic equivalents, this can be a bit daunting.
Rolling down will be the same and perhaps easier to understand. For simplicity, let's pretend no dividends or carry cost so that I can make up workable option numbers where puts and calls have the same premium ATM.
For the CC, you buy the XYZ at 17.50 and sell the Oct 17.50c for 1.25. If exercised, you make 1.25 and if XYZ drops, you own it at 16.25
For the NP, you sell the Oct 17.50p for 1.25 with the same result. If it expires, you make 1.25 and if XYZ drops, you own the stock for 16.25
Now supoose XYZ drops to $15. You're down $1.25 on either position. Suppose the Dec 15c and the Dec 15p are going for 2.00
For the CC, you roll: Buy back the Oct 17.50 call for .25, pocketing 1.00 while carrying a paper loss of 2.50 (1.50 net loss) and you sell the Dec 15c for 2.00 and you now have a potential profit of 50 cts and a new cost basis of 14.50
For the NP, you buy to close the Oct 17.50p for 2.75 for a loss of 1.50 and sell the Dec 15p for 2.00. You now have a potential profit of cts and a new cost basis of 14.50 if put the stock.
Same result either way. The only thing that you have to watch out for is wash sales but that's no problem if you close the position by 12/31
Clear as mud? (g)
Is it not easier to adjust a covered write that is going against you than a naked put? With a covered write, I have the option to roll down, or out a month and down, and it seems that with puts it is much more difficult to roll down or out and down and still have profit potential. Also, with a covered write, I have the oppurtunity to buy back the call if the stock drops, and sell it again if the stock bounces for more profit--this adds more risk I know, but with a naked put this oppurtunity does not exist. Please comment as I am still learning.
--------------------------------------------------------------------------------
Whatever you do with calls can be done with puts and/or stock. Regardless of whether your initial position was a CC or a NP, you can buy the Oct 17.50 call in both cases (to close with the CC and to open with the NP) and still have the same result. If you aren't familiar with synthetic equivalents, this can be a bit daunting.
Rolling down will be the same and perhaps easier to understand. For simplicity, let's pretend no dividends or carry cost so that I can make up workable option numbers where puts and calls have the same premium ATM.
For the CC, you buy the XYZ at 17.50 and sell the Oct 17.50c for 1.25. If exercised, you make 1.25 and if XYZ drops, you own it at 16.25
For the NP, you sell the Oct 17.50p for 1.25 with the same result. If it expires, you make 1.25 and if XYZ drops, you own the stock for 16.25
Now supoose XYZ drops to $15. You're down $1.25 on either position. Suppose the Dec 15c and the Dec 15p are going for 2.00
For the CC, you roll: Buy back the Oct 17.50 call for .25, pocketing 1.00 while carrying a paper loss of 2.50 (1.50 net loss) and you sell the Dec 15c for 2.00 and you now have a potential profit of 50 cts and a new cost basis of 14.50
For the NP, you buy to close the Oct 17.50p for 2.75 for a loss of 1.50 and sell the Dec 15p for 2.00. You now have a potential profit of cts and a new cost basis of 14.50 if put the stock.
Same result either way. The only thing that you have to watch out for is wash sales but that's no problem if you close the position by 12/31
Clear as mud? (g)