Question on a covered call going the wrong way

[wayneL]

Quote from osorico:

1) There is nothing synthetic about owning the underlying, as is the posters scenario.

2) Generally, synthetic positions involve a combined position at the same strike. This is not the same as a collar as described.

3) Poster was clearly looking for exit strategy. Spreads are usually not used for such.


Osorico

You said:

Quote from osorico:you need to put on a collar. That is, sell the CC and buy a cheaper, lower strike put.

I'm afraid it is a synthetic bull call spread, and alters the greeks that could destroy the original intent of a cc

at entry price the CCs greeks are;

+ delta
- gamma
- vega
+ theta

at entry price the collars greeks depend where the strikes are and gamma, vega and theta will reverse depending on where the price goes.

This is the identical situation of a vertical bull spread with the same strikes.

Therefore the collar IS a vertical. This is the definition of a synthetic position.

You must agree then, that the collar changes the structure of the trade, depending on where the strikes are situated and may require a different view of stock movement.

Much is contingent on where the strikes are.

cheers

 

[Norman D Gutter]

jrl:

Quote from jrlvnv:

I don't understand why you would put this trade on in the first place. With a 100 share order you profit was only about 100 dollars. So you put up 7500 to make a 100. Now your looking to break even on the trade. In my opinion you should be looking for cheaper stock to do your CC with so you could buy more stock and sell more options. Just my 2cts though

Well, I would rather have $100 winners every day than a $10,000 winner once a year--or whenever.

Yes, the maximum potential profit for the trade was only $107 after all commissions (without assignment), 1.42 percent for two weeks. The way my record is, I'll take it. Maybe years from now, should I be consistently profitable and dealing in much bigger volumes, I'll not try such a trade. For where I am right now, that's all I should be attempting. Finally this week we closed out two consecutive swing trades with profit: one for $58 and one for $65. Our other two swing trades in progress are up $150 and $225. I danced a jig.

FWIW, I looked at my 50 candidates for those closest to the money and weeded down to about 12 candidates, then looked at potential premiums, calculated potential return with commissions figured in, and made my selection from there. I probably made a couple of mistakes in some part of this process. But I'm not going to claim an error in trying to make $100 on a trade.

NDG

 

[osorico]

Quote from wayneL:


Therefore the collar IS a vertical. This is the definition of a synthetic position.

 

[osorico]

Quote from Norman D Gutter:

I probably made a couple of mistakes in some part of this process. But I'm not going to claim an error in trying to make $100 on a trade.

NDG

 

[dis]

Quote from Norman D Gutter:


At present, I don't have authorization from my broker for naked option writing. Seems they don't see the risk potential as the same, for some strange reason.

Another word, you may not use stop loss orders because hitting a stop loss would leave you with a naked short call. :eek: IMO, your broker is unsuitable for a CC strategy.

 

[RichardRimes]

Quote from Norman D Gutter:

Hi Donna:
My problem is that, in our (my wife and I trade together) swing trading, we have a terrible record of picking stock direction. Our losses are not large due to good risk management, but still we are only 1:2 winners:losers on trades. I wanted to stay in the market, but didn't want to keep doing what wasn't working and didn't seem to be getting better month over month. I've been accumulating some covered call candidates for some times, based on chart patterns showing stocks doing almost next to nothing, moving up and down in very narrow ranges. When we got two weeks into the February option cycle, I decided to put on some covered calls to test the waters and enter some trades. I picked several as close to ATM as I could, bought 100 or 200 shares, and sold the front month calls. I looked for modest premiums, 1 to 2 percent time value remaining, and discounting any small ITM amounts. I have six of these on, spread between my trading account and my IRA. One is at maximum profit and assignment is probable; three are profitable; one is slightly negative; and this INFY thing has wiped out the gains of the four winners.

If I could predict the underlying with even 50 percent accuracy, I'd probably just be swing trading.

Best regards, and thanks,
NDG

Sorry Norman....i couldn't get past the statement "my wife and I trade together"
:eek: How long are you Married? just kidding...however when my husband and I tried to trade together it was a miserable failure...he finally gave up and let me have the reins and I'm doing much better going it alone. I do have to answer to him when I do something stupid or if our account isn't growing and having to articulate my strategy is a good thing I trade now only in our IRA for income and growth and definitely you need a broker who will allow cash covered puts and all other defined risk strategies. Options give you a wonderful way to hedge and protect as well as help you directionally (once you get a small understanding of volatility and how they affect options).

if you are only right 50% i would give up swing trading. I trade a basket of stocks and use options to buy them (sell the put) then sell the straddle etc. but I have followed these stocks for years and know abt when they are at there high/low,,,although my timing isn't great always I have very good patience. When I'm sold out I'll set an alert and when it goes down then I sell the put to hopefully buy the stock. Sometimes its months before it goes anywhere. Selling a CC definds when I want to get out of the stock. If stock goes down then I re-evaluate my opinion on it...fundamentally, technically and macro-economically. if I still believe in it then I will keep the stock and wait for a move up then write another call. If I can not justify holding it or have a better place for my money, I'll sell and take the loss. There are tons of ways to trade...the most important thing in trading is KNOW what type of trader you are and find how different styles and options work for you.

If you or your wife really arn't good at picking stocks then you really might want to investigate some neutral strategies on indicies which can make money as long as your only partly wrong. Thinkorswim gives a FREE seminar on "Beyond the Basics" which might be very helpful...check it out. Good Luck and you have my sincere admiration for being able to trade with your spouse!!!!

 

[OTR]

Norman,

Seems like you've gotten a lot of good advice from the board. I trade covered calls, but one of my 1st rules is that I only trade stocks that I wouldn't mind owning. I'm not worried about being too accurate on timing. If I get called out and make my maximum profit, great. If the stock dips and the call expires. No problem, I sell another call. With each call I sell, I'm lowering my cost of ownership of the stock.

INFY doesn't look like a good play to me. It had recently gapped down and not filled the gap. It is below its 50 and 200 day moving averages.

That being said, it looks like it may be resting on a support line. Why not sell another call? Before you do, make sure you have an exit strategy. It might be a good idea to put a collar on below the support line in case it doesn't hold.

For Instance:

INFY: 70.32
Sell 1 APR 75 Call 2.10
Buy 1 APR 65 Put 1.60

Results (not including your current loss)
Maximum Profit: 5.32
Maximum Loss: 4.68

If the support holds and INFY stays above 70, you will make a profit. If if doesn't hold, you will want to get out either by exercise, or close the position. Better yet. set a stop if the stock falls to 68.5 to close out the position and prevent maximum loss.

Consider your current loss to be "Sunk Cost". If you want to hold on because you believe in the stock, play it safe with this type of a position. at least you'll know the risk.


Regards,
Steve
http://www.options-trading-resources.com/EliteTrSig

Option trading information and tools the pros wish they had! A former Chicago Mercantile Exchange employee reviews stock option trading software, books, and web sites and online income opportunity.