Question about ITMN spreads/straddles

[cmhackett]

Good afternoon,

I'm trying to learn more about spreads and straddles and have come across the following situation "virtual-trading" ITMN:

On 3/18:
Bought one Jul 10 39.00 Call option for $8.70
Bought one Jul 10 37.00 Put option for $7.80

Around 3/23, the stock price for ITMN climbed past $44 (today it closed at $47.70). At that point, my call option's increased worth was about a hundred or two (can't remember exactly) more than my put option's decreased worth.

Since I felt that the increase in the underlying price was temporary, I took the following action:

On 3/25:
Sold one Jul 10 44.00 Call option for $9.50

All in all, at market close today I have the following position:

ITMN Jul 10 37.00 Put --> Qty 1 --> Price $4.70 --> Mkt Value $470.00 --> Cost Basis $780.00
ITMN Jul 10 39.00 Call --> Qty 1 --> Price $13.65 --> Mkt Value $1365.00 --> Cost Basis $870.00
ITMN Jul 10 44.00 Call --> Qty -1 --> Price $10.30 --> Mkt Value $1030.00 --> Cost Basis -$950.00

Here's what I'm wondering - was selling the call the right decision, given these circumstances? I wanted to lock in some of the profit (in case the stock dips back down below $44), but now that I look my trades over, I'm wondering if I too sharply limited my upside potential and caused my overall position to have an unrealized loss due to the original put purchase (which won't quite be offset by the $5 difference between my long and short call positions) - or is this unrealized loss only applicable if I hold til expiration?

If you were in this particular position, what would you do? Again, I'm just looking to learn, so I'm quite open to the possibility that one or more of the actions I undertook were idiotic.

Thanks!

 

[JJacksET4]

Quote from cmhackett:

Good afternoon,

All in all, at market close today I have the following position:

ITMN Jul 10 37.00 Put --> Qty 1 --> Price $4.70 --> Mkt Value $470.00 --> Cost Basis $780.00
ITMN Jul 10 39.00 Call --> Qty 1 --> Price $13.65 --> Mkt Value $1365.00 --> Cost Basis $870.00
ITMN Jul 10 44.00 Call --> Qty -1 --> Price $10.30 --> Mkt Value $1030.00 --> Cost Basis -$950.00

Here's what I'm wondering - was selling the call the right decision, given these circumstances? I wanted to lock in some of the profit (in case the stock dips back down below $44), but now that I look my trades over, I'm wondering if I too sharply limited my upside potential and caused my overall position to have an unrealized loss due to the original put purchase (which won't quite be offset by the $5 difference between my long and short call positions) - or is this unrealized loss only applicable if I hold til expiration?
Thanks!

cmhackett,

Basically, if ITMN continued to rise, you are correct in that you have locked in a tough scenario, where you will have $500 on the calls and $0 for the puts, but you now have about $600ish into the trade.

If you keep this adjustment, the hope or idea would be that ITMN would fall, and then you could rebuy the 44 call for a low price and in effect you would now again have the 37 put/39 call strangle for a new, reduced price. Of course, with the stock at 47 and change now, it might seem like a long shot, but you never know.

There are 2 main schools of though on what you could do given a good move and you have a straddle or strangle such as in this case.

I will give examples of these ideas assuming a stock price increase like here, of course, you would flip them if the stock had declined.

1. Roll the call up - in other words, sell the 39 call which was now worth more $ and buy for example the 44 call. In your example that would have brought in about $330 and would now leave you with a 37/44 strangle - farther apart legs for sure, but still potential gains in either direction. Basically this reduces your investment in the position and gives you $330 for other uses in your account.

2. Roll the put up - in this case, you would have salvaged what you could from the value of the 37 put and sold it for the $470 - then buy a higher strike put. For example, say the 42 put at the time was $900 - you could buy that - this means your position would now cost you $430 more then it had originally, but now you have a 42 put / 39 call position. No matter what, that position would be worth at least $300 at expiration.

Of course, after some hindsight it can be easy to determine that one idea would have worked more then another one, but before hand, its not so easy. Since your options still have til July, the stock still has plenty of time IMO to continue to move. I can't say what I would do, but if you want to continue to learn about straddles and strangles, I would consider at least buying back the 44 call and once again having potential in either direction. Maybe try open a different paper trade as a spread to learn more about those.

JJacksET

 

[jwcapital]

Quote from cmhackett:

Good afternoon,

I'm trying to learn more about spreads and straddles and have come across the following situation "virtual-trading" ITMN:

On 3/18:
Bought one Jul 10 39.00 Call option for $8.70
Bought one Jul 10 37.00 Put option for $7.80

Around 3/23, the stock price for ITMN climbed past $44 (today it closed at $47.70). At that point, my call option's increased worth was about a hundred or two (can't remember exactly) more than my put option's decreased worth.

Since I felt that the increase in the underlying price was temporary, I took the following action:

On 3/25:
Sold one Jul 10 44.00 Call option for $9.50

All in all, at market close today I have the following position:

ITMN Jul 10 37.00 Put --> Qty 1 --> Price $4.70 --> Mkt Value $470.00 --> Cost Basis $780.00
ITMN Jul 10 39.00 Call --> Qty 1 --> Price $13.65 --> Mkt Value $1365.00 --> Cost Basis $870.00
ITMN Jul 10 44.00 Call --> Qty -1 --> Price $10.30 --> Mkt Value $1030.00 --> Cost Basis -$950.00

Here's what I'm wondering - was selling the call the right decision, given these circumstances? I wanted to lock in some of the profit (in case the stock dips back down below $44), but now that I look my trades over, I'm wondering if I too sharply limited my upside potential and caused my overall position to have an unrealized loss due to the original put purchase (which won't quite be offset by the $5 difference between my long and short call positions) - or is this unrealized loss only applicable if I hold til expiration?

If you were in this particular position, what would you do? Again, I'm just looking to learn, so I'm quite open to the possibility that one or more of the actions I undertook were idiotic.

Thanks!

I'm not real crazy with selling that 44 call option. What you attempted was gamma scalping, but shortchanged yourself. I would have sold the underlying at 44 to lock in. You have no idea where the market will go, so don't beat yourself up. If the underlying drops back to 39, then buy it back--and repeat the process until the Friday before expiration. Works if the underlying drops below the put strike--just buy the underlying and and sell it when the stock rebounds. If the stocks shoots to the moon after selling you have sold it, you could do the following: Keep the trades in place until the Friday before expiration and cash out if there are no changes. Two, cash out the trade anytime it is profitable, and admit that you locked in a profit too soon. Three, achieve a delta neutral position again.

 

[spindr0]

Quote from cmhackett:

Since I felt that the increase in the underlying price was temporary...

I wanted to lock in some of the profit (in case the stock dips back down below $44), but now that I look my trades over, I'm wondering if I too sharply limited my upside potential and caused my overall position to have an unrealized loss due to the original put purchase (which won't quite be offset by the $5 difference between my long and short call positions) - or is this unrealized loss only applicable if I hold til expiration?

If you were in this particular position, what would you do? Again, I'm just looking to learn, so I'm quite open to the possibility that one or more of the actions I undertook were idiotic.

There's no simple answer because what's best depends on the future.

Since you felt that that a reversal was temporary, doing something to lock in some of the call's gains or reducing the strangle's cost was appropriate. Because you paid top dollar for the strangle (high IV), you needed a lot of move to offset the cost. Selling a call against the strangle does that but limits the upside. That's the trade off. If you want more upside, you get less offset and vice versa. But as you noted, by selling the 44 call, you locked in a loss for the position. So that wasn't a good thing to do.

I have issues with a long option posiiton in a pre/post high IV FDA situation. Initially, I would have looked at some multi-legged spread combination where I was selling some premium to offset the cost of the long legs. But given your question of what to do on 3/24 with a long 37p/39c strangle, I would have closed the position and taken the 2 pt profit. AFAIK, a high IV long option position is just not a good position to be in becuase you need to be very right to win.

But since you insist on making some adjustments (g), I would have looked at the possibilities of booking some profit by rolling up the profitable 39c (maybe to ATM) and selling a call maybe 5 pts further OTM (creating a bullish vertical). This would allow some add'l upside long call appreciation before the short call really kicked in. In addition, I would have considered selling a put with a strike a 2-4 pts higher than the 37p, creating another vertical.

Doing all 3 of these brings in add'l premium and change the risk profile dramatically. You do some/all of these because you seek to change the risk profile to a different outlook not because you want to play Adjusto-Rama.

 

[spindr0]

Quote from jwcapital:

I'm not real crazy with selling that 44 call option. What you attempted was gamma scalping, but shortchanged yourself. I would have sold the underlying at 44 to lock in. You have no idea where the market will go, so don't beat yourself up. If the underlying drops back to 39, then buy it back--and repeat the process until the Friday before expiration. Works if the underlying drops below the put strike--just buy the underlying and and sell it when the stock rebounds. If the stocks shoots to the moon after selling you have sold it, you could do the following: Keep the trades in place until the Friday before expiration and cash out if there are no changes. Two, cash out the trade anytime it is profitable, and admit that you locked in a profit too soon. Three, achieve a delta neutral position again.

Yes, the 44c sell was a bad choice because it locked in a $2 loss. Selling the underlying at 44 would have been even a worse choice, because his 37p/39c strangle cos 16.50 and that would have locked in a 11.50 loss to the upside.

If you meant selling enough stock short to go delta neutral at 44 (gamma scalping), I still wouldn't go for that because odds are, barring any new news, IV is going to drift down and that's a losing proposition for gamma scalping long option delta.

 

[jamesbp]

Quote from cmhackett:

Good afternoon,

I'm trying to learn more about spreads and straddles and have come across the following situation "virtual-trading" ITMN:

On 3/18:
Bought one Jul 10 39.00 Call option for $8.70
Bought one Jul 10 37.00 Put option for $7.80

Around 3/23, the stock price for ITMN climbed past $44 (today it closed at $47.70). At that point, my call option's increased worth was about a hundred or two (can't remember exactly) more than my put option's decreased worth.

Since I felt that the increase in the underlying price was temporary, I took the following action:

On 3/25:
Sold one Jul 10 44.00 Call option for $9.50

All in all, at market close today I have the following position:

ITMN Jul 10 37.00 Put --> Qty 1 --> Price $4.70 --> Mkt Value $470.00 --> Cost Basis $780.00
ITMN Jul 10 39.00 Call --> Qty 1 --> Price $13.65 --> Mkt Value $1365.00 --> Cost Basis $870.00
ITMN Jul 10 44.00 Call --> Qty -1 --> Price $10.30 --> Mkt Value $1030.00 --> Cost Basis -$950.00

Here's what I'm wondering - was selling the call the right decision, given these circumstances? I wanted to lock in some of the profit (in case the stock dips back down below $44), but now that I look my trades over, I'm wondering if I too sharply limited my upside potential and caused my overall position to have an unrealized loss due to the original put purchase (which won't quite be offset by the $5 difference between my long and short call positions) - or is this unrealized loss only applicable if I hold til expiration?

If you were in this particular position, what would you do? Again, I'm just looking to learn, so I'm quite open to the possibility that one or more of the actions I undertook were idiotic.

Thanks!

CM

Going back to your original trade; long the 37/39 strangle; a couple of simple trades that might have worked better as the UL price moved up;

1. Sell the 37p / 44c strangle for a credit of $15.00; would leave you long the 39/44 call spread for nett $1.50 debit.

2. Sell the 44p / 44c straddle for say +$20; would leave you long the 39/44 call spread and short the 37/44 put spread for a nett credit of say $3.50.

As you have already sold the 44c; you could still sell either the 37p or 44p on a pull back.

Cheers
James

 

[charts]

Quote from cmhackett:

... If you were in this particular position, what would you do? Again, I'm just looking to learn, so I'm quite open to the possibility that one or more of the actions I undertook were idiotic.

Thanks!

Options trading implies having an opinion about the future behavior of the BS model's parameters of your position: underlying price, implied volatility, delta, etc.. Then you open a position that will profit if your expectations are met. There is no position adjustment strategy that will be right for all possible outcomes.

When you opened your position you expected a significant change in the underlying's price without knowing in what direction, and / or an increase in implied volatility, and this in a relatively short time frame. Isn't it so? When you opened your position you had a plan of when and what to do if your position goes the way you expected, and when and what to do if it doesn't. Isn't it so? ...