Thursday, September 24, 2009

[TheOptionClub.com] Re: Quality Problem: Long D-ITM Calls

 

Buying the long 75 options is equivalent to having purchased 200 shares of the stock in Dec 2008 (in the mid 70's I am guessing) and then purchasing 2 puts at the 75 strike.

As long as you have the money you would have used to purchased the stock safely stashed away in cash equivalents, this is a good way to be bullish on gold, looked at from the long term, and hedging your position.

You have a delta of about .98 on those calls, and you could take some profit by rolling them up to .80 delta or less. You could even consider rolling up to ATM, if you have a bullish view through Jan 10 expiration but want to re-hedge and take some money out (to place into cash equivalents). You are giving up some upside, dropping the deltas, but you also have cashed in a large portion of your gains.

Writing ATM or slightly OTM front month calls against them, could make you some near term money, but if the underlying makes a big move up you will have to miss out on some of that. In fact if you are looking at the position as a hedged long position on GLD, I would not even do that. Rather I would leave it alone, and wait for expiration or another big move up.

--- In OptionClub@yahoogroups.com, "L" <silverdollarnyc@...> wrote:
>
> Hi - I'd love to have some help trying to make a proper adjustment to my wonderful long position. I've looked the Michael's article/PDF "Trade Adjustment Basics" and while I understand in in principle, I'm having trouble applying it to this position.
>
> I am Long 2 Calls on the GLD at 75 Strike, Jan 2010 expire. (GVDAW) I paid around $14 for them back in Dec 2008. GLD is up around $99 now.
>
> My outlook on GLD is bullish, but I know I could also easily be wrong and could watch my gains evaporate.
>
> According to Michael's adjustment decision tree, I would sell OTM calls. Problem is that the the premiums at the 100 and higher strikes are so small (less than $5.00) that they do little to protect my downside. If I go further OTM, the premium becomes meaningless.
>
> I've thought about buying a PUT at my BEP, that would be cheap at only around $1.50 or so.
>
> Quality problem, I know, but still, I'd love to get some guidance on possible ways to proceed.
>
> With thanks,
> Lance
>

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