Straddle postion entry..

M

matgallis

Hey guys.

I own a few lots of FAZ with a pretty hefty average price. Looking at a -40% loss with little expectation I can recover 40% + more. So i'm exploring position management to ease out of this position while minimizing losses maximizing any potential (unlikely) gains.

So i'm looking at a short straddle to maintain a position. Weighing the costs and full benefits of this idea while running the risk of a lost opportunity or being forced to purchase more of this dog @ a higher market price.


So if I look at the july 5 strike. I can sell both sides for .95 cents. I would be forced to buy x lots of faz @ $3.80 (.70 discount) if faz trades under 5.

If faz rises above 5, i'm forced to sell my position for 5.70


I would be easing into short puts/calls as the market warrants. If the ETF rises 13% i'll sell calls @ the nearest strike. ETF calls -13% i'll write puts etc etc.

Couple questions:

Maintaining a short put position while owning the underlining, i'm forced to upfront the capital to cover purchasing the ETF correct?

What other costs/benefits am I missing here? If i can manage this position for several months I will significantly reduce my loss and I would love for that to happen :)
 
Quote from matgallis:

Hey guys.

I own a few lots of FAZ with a pretty hefty average price. Looking at a -40% loss with little expectation I can recover 40% + more. So i'm exploring position management to ease out of this position while minimizing losses maximizing any potential (unlikely) gains.

So i'm looking at a short straddle to maintain a position. Weighing the costs and full benefits of this idea while running the risk of a lost opportunity or being forced to purchase more of this dog @ a higher market price.


So if I look at the july 5 strike. I can sell both sides for .95 cents. I would be forced to buy x lots of faz @ $3.80 (.70 discount) if faz trades under 5.

If faz rises above 5, i'm forced to sell my position for 5.70


I would be easing into short puts/calls as the market warrants. If the ETF rises 13% i'll sell calls @ the nearest strike. ETF calls -13% i'll write puts etc etc.

Couple questions:

Maintaining a short put position while owning the underlining, i'm forced to upfront the capital to cover purchasing the ETF correct?

What other costs/benefits am I missing here? If i can manage this position for several months I will significantly reduce my loss and I would love for that to happen :)
More...

The first thing you need to know is that owning FAZ and FAS is WRONG. They are for day traders ONLY. Managing this position is not likely to make things better.

There are designed to lose value over time, so whoever told you to buy them needs a good scolding.

1) If naked short the puts (as you would be), there is a margin requirement. But you do not have to front the dntire cost of being assigned - unless your broker requires that you must be cash secured.

2) Here's what you are missing. There is no need to attempt to recover lost money from a bad position. Go find a better position and make money from that.

Good luck

Mark
 
Quote from dagnyt:

The first thing you need to know is that owning FAZ and FAS is WRONG. They are for day traders ONLY. Managing this position is not likely to make things better.

There are designed to lose value over time, so whoever told you to buy them needs a good scolding.

1) If naked short the puts (as you would be), there is a margin requirement. But you do not have to front the dntire cost of being assigned - unless your broker requires that you must be cash secured.

2) Here's what you are missing. There is no need to attempt to recover lost money from a bad position. Go find a better position and make money from that.

Good luck

Mark
More...
Thanks for #1

2 is respectable and i appreciate your input, but faz has quite a bit of options premium built into them. I would like to use my negative opportunity to explore straddles and maintaining short/long positions without losing (additional) money.
 
The best choice is often to accept the loss and move on. In lieu of that:


A naked put = a covered call (NP = CC)

By adding a short straddle, you're converting your long stock into a CC and adding more of the same in the form of the NP. It's just dollar cost averaging down.

If assigned on the puts, you would not be buying "more of this dog @ a higher market price" because time premium received means a lower than current purchase price of "more of this dog". :)

If you sold the July 5 straddle for .95 cents and you were assigned on the puts, you would be buying more @ $ 4.05 not @ $3.80 ... based on your assumption that the entire premium received is the new position rather than the call premium belonging to the existing shares (CC) and the put premium belonging to the new if assigned equity position. Then, the assigned price would be $5 less the put premium. Either way, it's $5 less the premium (whichever way you look at it) not current price less the premium.

"If faz rises above 5, i'm forced to sell my position for 5.70"

No, you're forced to sell it for $5 and you keep the premium received. Net proceeds from the sale plus expired option premium would be $ 5.95

I don't know a thing about FAZ but if it has any kind of intraday or several day movement and if you have concluded that you're not going to make up the loss any time soon, if at all, I would day trade a portion of the long shares. Rather than doubling down now and dedicating several option cycles to trying to get closer to break even, I'd try to scalp 5-10 cts or more here or there on your existing shares. You have all year to do it since the tax man only cometh on 12/31. The hardest part mentally accepting the loss. After that, it's a lot easier :)
 
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