Should I take a loss on my naked call now?

N

nickyang07

I guess I really under estimate the volatility of options. So I wrote a naked Jan 31 call for BA 340 few days ago when BA was really weak. Did not expect it bounced back so hard on 300 level. I thought even with earning, it won’t just come back to 340 in less than 2 weeks. Now it’s getting close to ATM. Plus all these news, not very confident about if it can stay below 340.

if I take a loss now, I still can accept it, if I wait after earning, i am really afraid it may gap up way above 340.

Is there suggestion? I guess I could do:
1. Take a loss on Monday
2. Let it run and take the loss until late Tuesday, since price may come down a little bit and I still have some room
3. Hedge positions either buy the stock or a call, but if I buy the call , what’s strike u recommend?

thanks
 
RedDuke said:
Depends on how much is at stake and what is your plan.
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Not a lot, just few contracts. The problem is my entry is around 0.57, and now is 2.00$..... Even on last Friday, it was alright, until the stupid news came in...

Based on the technical level, I feel 340 is ok, but I sold the call at worst timing, did not collect enough premium. My plan is to practice... lol

Anyway, this is a bad trade.
 
nickyang07 said:
Thanks, I'm thinking on it. I guess the best way is to cut loss before the earning. I should do a hedge right at beginning. Now the price to hedge also put me at a awkward position.
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A hedge is almost always more expensive than an exit. If it’s causing you stress, best course is to exit. Depending on how I feel that means taking of 1/3 or 2/3.

Taking position off allows some time to think less emotionally. And it’s easier to act once you’re started acting - in a significant enough way. 10% wouldn’t really trigger the response.

If a position moves against you and makes you feel happy then accumulate more. If it makes you stressed then cut. Happiness should be correlated with the “I know exactly what’s happening, whose getting squeezed and have accounted for all known variables, am at the top of my game and make tons of $$$”. All other scenarios should make you stressed and you should cut.
 
I would close the trade as a loss but at the same time I absolutely hate selling premium so I wouldn’t have placed the trade to begin with. My guess is you’re over allocated. So if you decide to leave it on you need to make sure you understand what’s at risk and analyze the situation your in.

Here are the facts of your trade right now:
  • BA has their earnings report on 1/29. BA usually moves 10-15 points on earnings but has also been known to gap 25+ points at times
  • You're -20 delta and the big risk here is -1.94 gamma. With that as the price of BA starts moving closer to your short call, your delta will be going more negative at a quicker pace. The value of the call increases exponentially amplifying your loss.
  • You're collecting $46 theta a day which should get you out of the hole on this trade as time progresses. I suspect is not accurate as implied vol won't back down very much until after the earnings announcement.
  • If BA has a 2 sigma move to the upside on earnings, you will be down around $1300 per contract at expiration
  • If BA stays within its implied volatility range (the more likely case), your trade will expire worthless and you'll keep the .57 initial premium.
Based on the current implied volatility, the market believes we're going to move $16.84 between now and expiration. BA is at 323 right now, add the expected move of $16.84 and you're almost exactly at your 340 call. This tells you your trade will be a $57 winner 68% of the time (one standard deviation).

Look at the PnL on the price slices on 1 and 2 standard deviation moves:
BA.PNG

If it were me, I'd get out of the trade while I still can. This may be decent if the earnings report wasn't coming up due to how far OTM your call is. But BA has had a lot of negative news lately so there's a possibility positive news on their 737 Max could could gap the stock up. If this happens your account value would plummet just like their planes. Too soon?

tl;dr - the juice ain't worth the squeeze.
 
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